INTRODUCTION TO ENTREPRENEURSHIP - Ver2r PDF

Entrepreneurship courses in Tbilisi State University Part A
INTRODUCTION TO ENTREPRENEURSHIP
PART A:
THEORISING ENTREPRENEURSHIP
The Background of the Entrepreneurial Activity
Joseph Hassid
Alexios-Stefanos Komselis
May 2007
University of Piraeus May 2007 0

Table of Contents
Table of Contents.............................................................................................1
Foreword..........................................................................................................3
Introduction to Entrepreneurship Theorising Entrepreneurship ....................4
1. Approaches to Entrepreneurship..............................................................5
1.1 Economics ..........................................................................................6
1.1.1 Arbitrage and uncertainty .............................................................6
1.1.2 Co-ordination of the production factors ........................................8
1.1.3 Innovation.....................................................................................8
1.1.4 Skill Differentiation........................................................................9
1.1.5 Career Mobility ...........................................................................10
1.1.6 A Final View of Economic Theories............................................11
1.2 Psychology .......................................................................................12
1.2.1 The need for achievement..........................................................12
1.2.2 Internal Locus of Control ............................................................13
1.2.3 Risk Taking Propensity...............................................................14
1.2.4 Tolerance of Ambiguity...............................................................14
1.2.5 Type A Behaviour ....................................................................14
1.2.6 Criminal Propensity ....................................................................14
1.2.7 Independence and Job Satisfaction ...........................................15
1.2.8 Over-Optimism ...........................................................................15
1.2.9 Criticism of the Psychological Traits Approach ..........................17
1.3 Personal, Family and Social Issues ..................................................18
1.3.1 Marriage .....................................................................................18
1.3.2 Health and Disability...................................................................19
1.3.3 Age, Education and Experience .................................................19
1.3.4 Family.........................................................................................21
1.3.5 Unemployment ...........................................................................22
1.3.6 Regionality .................................................................................23
1.3.7 Immigration and Ethnic Minority .................................................23
1.3.8 Female Entrepreneurship...........................................................25
1.4 Macroeconomic Factors....................................................................28
1.4.1 Economic Development .............................................................28
1.4.2 Industrial Structure .....................................................................28

1.4.3 Government Policy .....................................................................29

1.5 A Final Look at the Entrepreneur ......................................................31
2. Introduction to the Entrepreneurial Process ...........................................39
2.1 The Drive behind Entrepreneurial Change........................................39
2.2 The Entrepreneurial Process ............................................................40
2.3 The Entrepreneurial Mindset.............................................................42
3. Entrepreneurship of need vs. of opportunity ......................................45
4. Serial Entrepreneurship..........................................................................48
5. Entrepreneurial Networks .......................................................................51
6. Intrapreneurship and Innovation.............................................................56
7. Small and Medium Enterprises...............................................................60
7.1 Definition...........................................................................................60
7.2 SME Importance and Survival ..........................................................63
7.3 The Difference between Entrepreneurship and SME Management..65
8. Future Challenges for Entrepreneurship Research ................................70
Part A Bibliography and Further Reading ......................................................73

Foreword
There are good arguments to support the rapid increase in entrepreneurship
education. By stimulating young minds to embrace enterprise values a
dynamic and challenging mindset is encouraged. It is believed that enterprise
education will greatly contribute to increasing learners; motivation and to
making the school system more attractive, relevant and effective.
The above arguments are clearly sufficient to justify the introduction of

Entrepreneurship courses in higher education institutions and even to lower
levels of the educational systems especially in countries where the
economic system is undergoing changes and is directed towards market
economy operation.
The University of Piraeus has a long tradition and expertise in designing such
courses and in delivering entrepreneurship related educational material.
With the generous support of the Government of Greece (Ministry of Foreign

Affairs Hellenic Aid programme) and the cooperation of the State University
of Tbilisi in Georgia, it became possible for a Course in Entrepreneurship to
be introduced.
The manual in hand constitutes part of the educational material to be

delivered. It is planned that this will be supplemented with other materials
which will stimulate students class work, facilitate interaction and promote
better comprehension of both theoretical issues and practical dimensions of
entrepreneurship.
It is hoped that, with the cooperation of local TSU partners, the support of the
Universitys Administration and the active contribution of the students
themselves, the course will achieve its objectives and secure its sustainability.
Professor Joseph Hassid

Project Coordinator

Introduction to Entrepreneurship
Theorising Entrepreneurship
In this initial Part A of the Introduction to Entrepreneurship, we will go through

the main concepts and ideas that have been formulated by academics and
researchers. Initial and seminal input from the previous centuries, and
contemporary theory will provide the background to the practical application of
entrepreneurship within the modern economies and markets. So, theories
from the fields of economics and psychology, and several other factors that
have been related to entrepreneurship are presented below. The scope is to
gain an overall understanding of the entrepreneurial process and better
understand the modern theory and practice.
However, before we go into the theories and issues regarding

entrepreneurship, we need to offer a definition of the term. The word
entrepreneur is of French origin and literally means the person that takes
between the middleman; in a more free translation, the individual who
pursues a commercial activity. As Bruyat and Julien (2001) point out, defining
entrepreneurship is still a major dispute among researchers and the word
entrepreneur still has no common meaning among the academic community.
There are several approaches to this issue, which come from different view
points and have their roots within the theory that each scholar adopts as the
basis for his or her research. The explanation and presentation of the various
streams that dominate the definition debate is not within the spectrum of this
work. Anyone interested in studying the lively dialogue on this issue can refer
to some of the many papers that deal with it. So, we will adopt a very broad
definition for entrepreneurship that incorporates business owners and
self employed individuals. Also, as explained further below, individuals that
exhibit entrepreneurial behaviour while being employed (what is called
intrapreneurship) are included in our definition. Finally, the only distinction that
holds in this work is the distinction between Small and Medium Business
Management and Entrepreneurship. The latter, includes the notion of growth
and business development, while the former only describes how to run a
business.

1. Approaches to Entrepreneurship
Learning Objectives:
After having read chapter 1.1 you should be able to:
Understand the key economic theories that have been developed
over the years in relation to entrepreneurship.
Understand the psychological traits approach to the individual
entrepreneur.
Understand the main issues related to personal, family and social
status in relation to entrepreneurship.
Understand other macroeconomic factors that influence
entrepreneurship.
Differentiate between the theoretical approaches to
entrepreneurship and critically assess their contribution to the field.
Theories that are dealing with entrepreneurship come mainly from three
different disciplines of research: economics, psychology and sociology.
Economists look into the effect of entrepreneurship on and the role of the
entrepreneur in economic development, as well as application of economic
and growth theories within the entrepreneurial context. Psychologists have
been interested in identifying the personal characteristics and traits of
entrepreneurs. Sociologists have been looking into behavioural aspects of the
entrepreneurial personality and its interaction with other social constructs. All
of these approaches to entrepreneurship help us understand the way it works
and how entrepreneurs behave. However, theories on entrepreneurship that
come form psychology and sociology are sometimes questionable and
controversial, and the reader must therefore use them to understand rather
than define the entrepreneur. Finally, nowadays, research on
entrepreneurship has been established as a distinctive field for scholars to
search, formulate and propose new theories.
The focus on entrepreneurship is attributed to the importance of Small and

Medium Enterprises (SMEs) for national economic growth and labour
creation. In order to have growth within the SME sector, entrepreneurs are
needed to run businesses and demonstrate their capabilities. SMEs have

become important to national economies lately since the middle of the 20th
century and thus research in this area is still young and ongoing. This fact
also explains why research on entrepreneurship has been left out by many of
the mainstream classical economic thinkers and only economists considered
outsiders in their times looked into it. And this brings us to the first evidence of
the entrepreneur in economic thinking.
1.1 Economics
Economic thinking in respect to entrepreneurship can be divided into two
eras. The early views of entrepreneurship include thinkers such as Cantillon,
Say, Schumpeter etc. Modern views include Kanbur, Lucas etc. Early
theories on entrepreneurship are more of concepts delivered by
economic thinkers, while modern theories are presented by economists
on a more technocratic and scientific manner. Early economists, who
introduced the term entrepreneur in economic theory, mainly focused on four
different projectiles. Below you can find the main economists behind each
approach, not in chronological order, but categorised per approach. Modern
economic theories on entrepreneurship come from the neo-classical
microeconomics and they primarily try to look into the optimisation of the
choice between entrepreneurship and employment. They differ from early
views in mainly two ways. Firstly, they adopt Knights (1921) proposition that
people become entrepreneurs by choice. A choice that is based on the utility
maximising paradigm, meaning that people choose to be entrepreneurs over
paid employment when the expected return is greater. Secondly, modern
economic theories often assume that perfect competition exists in markets,
technology is given and all supplying market participants are price takers. This
is mainly done for reasons of simplicity. Further below the reader can find the
key contemporary approaches to entrepreneurship.
1.1.1 Arbitrage and uncertainty

The first one to introduce the word entrepreneur and highlight its importance
for economic growth was the French scholar Richard Cantillon (1755).
Cantillon proposed that entrepreneurs act as middlemen, buying at one point
and selling at another. They became important for the economic development
as private property rights became available to more people. Within this

process, entrepreneurs perform all exchanges and bear the risk of buying at
certain prices and selling at uncertain ones. Hence, a Cantillons
entrepreneur is anyone who has uncertain income. So, successful
entrepreneurs are important to the economy, since they alleviate economic
paralysis caused by uncertainty and risk. His approach implies that same
doctrine behind Darwins evolution theory; only the fittest will survive.
Unsuccessful entrepreneurs are therefore going to fail and the risk taken will
force them out of business. The key role of Cantillons entrepreneur is not that
of an innovator, but rather that of a profit seeking person. Perception,
intelligence and risk taking help him bring together the two ends of a market.
So, entrepreneurs will enter a market if profits persist and the amount of
income is relative to the risk embedded in the specific markets transactions.
Kirzner (1973, 1985) developed Cantillons thoughts looking into the

middleman role of the entrepreneur. In his view, the entrepreneur sees and
exploits an opportunity that is there for everyone to see. Therefore,
successful entrepreneurs have an increased level of alertness and manage to
notice what other market players oversee. Kirzners entrepreneur gains on
imperfect knowledge, meaning that he has some additional knowledge that
differentiates him form others. This knowledge comes from costless
information, the mere identification of something that has always been there.
Knight (1921) focused on Cantillons entrepreneur in respect to uncertainty.

Entrepreneurial uncertainty stems from unknown availability of natural
resources, technological change and price changes. Profits are uncertain,
although input prices are given. Therefore entrepreneurs need to be self-
confident, judgemental, venturesome, posses the ability to foresee and lucky.
Knight suggested that the choice of becoming an entrepreneur rather than a
worker is dependent on the rewards relative to the uncertainty in each sector.
So, entrepreneurs are not born but are opportunistic individuals that either
turn to become entrepreneurs or paid employees, depending on the profit
making possibilities of market relative to the inherent risk.

1.1.2 Co-ordination of the production factors

The second approach towards understanding the entrepreneur was initiated
by Jean-Baptiste Say (1828). Say proposed that central to the entrepreneurs
role in the economy is the combination and co-ordination of the factors of
production. He or she sits at the middle of the economic system and its
market, directing and rewarding the various factors of production, and
receives the difference between sales and cost as his profit. The factors of
production are materials, people, information and capital. Within these factors,
Say includes personal characteristics such as experience, judgement and
perseverance that are considered to be scarce. Therefore, entrepreneurs,
who simultaneously posses these characteristics, will be successful. Another
key issue regarding Says approach is the ability of the entrepreneur to
overcome difficulties, solve unexpected problems, and exploit existing
knowledge. Several scholars, such as Hebert and Link (1988), have criticised
Say and his entrepreneur as being nothing more than a skilled worker with
managerial capabilities. Others, such as Casson (1982), have pursued this
route and offer more contemporary insight into Says entrepreneur.
1.1.3 Innovation
Only in the early 20th century did Josef Schumpeter (1934, 1939) introduce
innovation to the literature on entrepreneurship. Schumpeters entrepreneur
operates outside conventional technology and introduces significant changes
to the production process, rather than small improvements. So, the
entrepreneur either does new things or does things that are already
being done in a completely new way. According to Schumpeter this
involves:
new product creation,
new production method,
new market opening,
new source of supply capturing, or
new industry organising.
In his view, the entrepreneur is an exploiter (similar to Say) and his actions
are responsible for shifts within business cycles and economic development.
Schumpeter will be remembered for his term creative destruction that

depicts the entrepreneurial activity. A wave of innovation hits the market,

discards traditional products and processes, and is followed by imitation on
behalf of the competition. This will lead to a new point of equilibrium. This
means that entrepreneurial profit is limited to a specific time interval, within
which the market is unstable and the entrepreneur maximises profits, unless
the entrepreneur continues to innovate. As far as personality is concerned,
Schumpeter viewed the entrepreneur as a unique personality, an unusual
creature who relies on instinct rather than calculations. He also argued that
profit is a residual and not a return for being a production factor, and that
entrepreneurs are never risk bearers compared to capitalists who are. His
latter point has been heavily criticised by modern scholars, mainly for the
distinction between capitalists and entrepreneurs.
1.1.4 Skill Differentiation

Casson (1982) is the most prominent modern economist, who attempted to
approach entrepreneurship by combining former economic literature. His
theory is mainly twofold. Initially, Casson sees the entrepreneur as an
individual who co-ordinates production resources and, in order to do this
effectively, possesses extraordinary skills. These skills help the entrepreneur
to put in use the limited resources and produce an output that is unique,
based on his or her abilities. The backbone of the Cassonian entrepreneurial
process is the decision making process that reallocates resources. So, the
entrepreneur needs to be able to have power over and manage resources,
and, therefore, needs capital. In Cassons view, regional differentiations in
entrepreneurial activity relate to personal wealth (such as home ownership).
Secondly, Casson believes that change is the companion of
entrepreneurship. To support this theory, he describes a situation where
demand and supply for entrepreneurs is similar to the demand and supply
curve of perfect competition markets. As expected rewards for entrepreneurial
activity increase, the number of entrepreneurs increase, while the lower the
reward the higher the demand for change agents (i.e. entrepreneurs) is. In his
work, entrepreneurs elicit change, and change elicits entrepreneurial
opportunities. So, the reader might comment that the most capable
entrepreneur will be the one who initially sees the expected rewards, while
others are still blindfolded.

1.1.5 Career Mobility

In modern econometric thinking, theories are being developed in order to
examine the actual choice of an individual to either become an entrepreneur
or an employee the choice between self employment and paid employment.
There are two main streams of research, one that considers that all
individuals are the same using the word homogeneous and the other
one that people are different using the word heterogeneous. The approach
that considers all workers to be the same and possess similar characteristics,
has modelled several propositions that are rather advanced and detailed. In
general, the main focus of this approach is to understand when people
choose to become self employed over being employees relative to factors
such as income, risk, risk aversion and the equilibrium number of
entrepreneurs in a specific market. The reader may find it interesting to look
into some of these theories, as formulated by several researchers, such as
Appelbaum and Katz (1986), Kanbur (1979) and Sheshinski and Dreze
(1976). These models, however, consider for reasons of simplicity that
there is no cost in switching from one career choice to the other, while in
reality there are both direct financial and sunk costs innate in these decisions.
Moreover, mobility between paid employment and self employment is not as
straightforward within a real market place as it is considered in this model.
The reason that researchers have chosen this rather simplifying approach is
that they need to examine the mobility dynamics within the workforce, identify
key issues and then gradually move over to applied research. So, results are
still ambiguous and no clear explanations have been given by such models.
However, there have been attempts to incorporate career mobility cost within
these models, for example by Dixit and Rob (1994) and Parker (1997).
The second approach, the one that considers people to be different in matters
such as their entrepreneurial ability, builds on the early economic theories of
entrepreneurship. Casson as described above can be considered as the
modern economists that brings together these streams of thought. The key
theorist behind the heterogeneous model of entrepreneurship in modern
economics is Lucas (1978). Lucas developed two sub-models, one static,
where all is equal apart from individual managerial/entrepreneurial abilities,
and one dynamic, where firm size is considered differentiated and variable.

Lucass static model shows that there are three types of workers,
entrepreneurs, marginal entrepreneurs and paid employees. Within this model
it is assumed that more able entrepreneurs run larger businesses. His
dynamic model proposes that when it is less likely to have more
entrepreneurs, increases in per capita capital decrease the number of
entrepreneurs and increase the firm size. For his latter model, evidence is not
straightforward and, thus, many economists have attempted to expand it and
reach conclusions.
1.1.6 A Final View of Economic Theories

As a final comment, it is essential to stress out that economists have shifted
their focus from a theory building process to detailed analysis of
econometric models. Historically, the initial economic thought on
entrepreneurship came form unconventional thinkers, such as Schumpeter,
who were not accepted by their peers. This non-mainstream output, that
opened economics to the fields of psychology and business, is now the
groundwork for highly theoretical models.

1.2 Psychology
Many psychologists have devoted their research activities to the entrepreneur.
Obviously, psychologists are not looking into economic parameters or
the contribution of the entrepreneur to the society, but focus on
understanding and describing the person that chooses to become one.
During recent years, economists have started to include in their research
parameters from the psychological school on entrepreneurship, in order to do
cross-discipline tests on entrepreneurial and self-employment models.
There are four key personal traits that have attracted the attention of the
psychologist, as outlined by Amit, Glostein and Muller (1993). These traits are
the first four ones that follow and are linked to the entrepreneur in a way that
entrepreneurial activity can be explained, along with the choice to bear risk.
Since the list of personal characteristics that have been looked into by
academics is much longer; further elements of the psychological approach to
entrepreneurship are listed below.
1.2.1 The need for achievement

In 1961 David McClelland presented one of the first systematic approaches
towards understanding the entrepreneurial personality. In his work he
attempted to provide an entrepreneurial profile; the same thing that most
psychologists tried to produce. So, in his seminal work McClelland introduced
the business heroes, entrepreneurs that inspire younger generations and
promote the essentiality of entrepreneurial activity. In this direction, he
identified the key characteristic of the entrepreneur to be the need for
achievement, rather than the desire to make money. He labelled this need
for achievement as n-Ach and derived a tool with which one can measure it.
He argued that societies with a higher measure of n-Ach on the average
produce more active entrepreneurs and, thus, faster economic growth
than societies with lower n-Ach on the average. People with high scores of n-
Ach will seek independence and will pursuit more difficult tasks to undertake.
Sources of higher n-Ach include:
Parents who encouraged independence in childhood.
Praise and rewards for success.
Association of achievement with positive feelings.

Association of achievement with one's own competence and effort, not

luck.
A desire to be effective or challenged.
Interpersonal strength.
So, according to McClelland, the most satisfying thing for the

entrepreneur is the recognition of the success, and not the success per
se. He also introduced two other measures, n-Aff (for Need for Affiliation)
and n-Pow (for Need for Power), which have further contributed to the
understanding of human action and interaction. In general, apart from being
high achievers, McClelland described entrepreneurs as individuals that are
inclined to:
be proactive and committed to others,
take personal responsibility for their decisions,
prefer decisions with moderate amount of risk,
crave feedback on their performance, and
dislike repetition and routine.
1.2.2 Internal Locus of Control

Another psychological view of the entrepreneur suggests that individuals that
choose entrepreneurship over paid work have the innate belief that their
performance is a result of their own actions, rather than other peoples
activities or external factors. This is called in psychology internal locus of
control meaning that the centre of control lies inside the person, rather
in someone elses or fates hands. Therefore, it has been argued that
people with an internal locus of control will choose self-employment over
dependent employment. Rotter in 1982 derived a tool to determine the
location of an individuals locus of control. This metric scale helped in the
direction of empirical tests regarding this theory. However, different studies
using the Rotter Scale give us differentiated results, and the internal locus of
control theory is therefore considered to be controversial.

1.2.3 Risk Taking Propensity

Entrepreneurs are considered to be individuals with less risk aversion than
the ones that choose employment. The key element of this entrepreneurial
trait is the difference between the attitude towards risk and the actual or
perceived level of risk. So, entrepreneurial behaviour is directed by both the
individuals attitude towards risk taking and his or her understanding of the
complex business environment.
1.2.4 Tolerance of Ambiguity

Furthermore, Entrepreneurs are described by scholars such as Timmons in
1976 as individuals that, compared to others, can better handle complex
and unstable working environments. This means, that people who chose
self-employment over paid employment, are comfortable in venturing within
unstable and dynamic business circumstances.
1.2.5 Type A Behaviour

Entrepreneurs demonstrate behaviour characterised by aggression,
competitiveness, striving for achievement and impatience (Boyd, 1984).
1.2.6 Criminal Propensity

This stream of theory claims that entrepreneurs are people that dont fit in
with the rest of the society. They are described as misfits or displaced
individuals that operate far from the societal mainstream. Moreover,
entrepreneurs are considered to be capable of illegal activities and criminal
behaviour (Shapero, 1975; Kets de Vries, 1977). The latter proposed in his
work that problems regarding an individuals childhood make it difficult for him
or her to accept authority or work within teams. Hence, they start out on their
own and try to increase their self-esteem, which is considered to be low along
with the individuals self-confidence. This theory has been very intriguing for
researchers and many have tried to identify empirical evidence. However,
although several studies both psychological and econometrical have
located empirical findings that back this proposition, other surveys have
managed to negate this theory.

1.2.7 Independence and Job Satisfaction

Another significant issue surrounding the entrepreneurial personality is the
most attractive characteristic of self-employment, independence. The self-
employed individual can arrange time and effort to suit ones own needs
and expectations. This is commonly called being ones own boss. This
notion goes back to Knight (1921), but non economists have also focused on
it. Recent economic studies have been looking into why individuals remain
self-employed, although they could be earning more if working for someone
else. Hence, the term job satisfaction is introduced, which is not always
related to pay and includes other sources of satisfaction that are unique to
each individual. So, studies have shown that self-employed individuals and
entrepreneurs consider that important work related issues, such as initiative
and the work itself are more significant than pay and security (Taylor, 1996).
However, other studies showed that job satisfaction is not necessarily related
to overall satisfaction, since the self-employed work longer hours and are
solely responsible for any problems of their work (Parasuraman and Simmers,
2001). So, job satisfaction appears to come at a cost that has to do with work
related and personal life induced stress, which is on its own a reason to
choose paid employment over becoming an entrepreneur. Ultimately
therefore, independence is a key variable in the choice of employment status.
1.2.8 Over-Optimism
Psychology has been looking intensely into individuals that appear to be
over optimistic, especially about situations that are not completely
under their control. Entrepreneurs appear to be systematically over-
optimistic, compared to other people within the same market. Several scholars
have tried to establish over-optimism as the key feature of the entrepreneur,
the feature that can explain all other essential psychological traits of such
people and definitely the one of risk attitude. Cooper, Woo and Dunkleberg
(1988) identified within their sample of entrepreneurs what they called
entrepreneurial euphoria, namely the belief of entrepreneurs that their
chance of succeeding is much higher than the one of others in the same
market. However, subsequent studies showed that over-optimism is not only
present within the community of the self employed, but also within the one of
paid employees. Therefore, over-optimism is considered to be more of a

cultural tendency, rather than a personal trait (Arabsheibani et al., 2000). In

this study though, it was identified that entrepreneurs were systematically
more over-optimistic than paid employees. Hence, it could be concluded that
in an over-optimistic society, individuals that choose self-employment over
other wealth creating options will belong to the group that has the highest
optimism rates.
A question that economists have been trying to answer is how is it possible for
over-optimism to dominate the market, taken into account that over-optimism
deviates from rational economic behaviour especially in terms of
maximising returns. So, although it is rationally expected that realists will
dominate in the market, while over-optimists will not sustain, there are several
reasons to claim the irrational:
When the returns of entrepreneurial activity become equal to the ones
produced by paid employment, realists will choose to work for someone
else, while over-optimistic individuals will remain in the entrepreneurial
arena (de Meza and Southey, 1996).
Over-optimists will work harder and save money in cases of failure, in
order to compensate for problems that arise from their skewed belief of
the market (Manove, 2000).
Over-optimistic individuals will hardly copy business practices that are
existent in the market. They will probably follow what they consider to
be innovative and, in order to find that, they will feel confident to
explore their environment. So, they are highly probable to access
information that might offer a competitive advantage (Bernardo and
Welch, 2001).
Over-optimism might inspire outsiders such as investors, customers
and suppliers through high self esteem, incorporating ambition and
potential.
So, as mentioned previously, over-optimism as a personal or cultural trait can

be the background for all the previously mentioned entrepreneurial
characteristics that psychologists have attempted to sketch, in order to obtain
the entrepreneurial DNA.

1.2.9 Criticism of the Psychological Traits Approach

The psychological traits theory of entrepreneurship attempts to outline the
profile of the individual entrepreneur, by identifying specific areas in which he
or she differs from the rest of the society. So, this approach has received
broader criticism, mainly because theories have been formulated over the
years, but no unique set of characteristics has been outlined. The main
stream of criticism relies in the fact that even under the assumption of an
entrepreneurial personality, market factors and universal circumstances also
play such a significant role in the entrepreneurial activity that one cannot
attribute success or failure to one specific personality type. Also, it is being
argued that this approach to entrepreneurship seems to be personifying all the
desirable characteristics of the ideal businessperson (Kaufmann and Dant,
1998). So, although this stream of theory offers great insight and
understanding of the various personal aspects of entrepreneurship, it is
agreed that psychological factors are not sufficient (or even necessary)
conditions to explain economic activity by the self employed and
entrepreneurial individuals.

1.3 Personal, Family and Social Issues

Apart from the economic and psychological theories, one can make various
assumptions about individuals that choose self employment and
entrepreneurial activities as a career path. These assumptions have been
formulated mainly by sociologists and looked into by researchers to
identify correlations and trends. The ones that follow are by no means
exhaustive, but represent the major concepts of personal and interpersonal
circumstances
1.3.1 Marriage
Theoretically, it is argued that entrepreneurs are more likely to be married
than not married, mainly for five reasons:
1. The wife or husband can contribute capital for the start-up or expansion
of a business. Capital that is informal and may even come from the
spouses family, without the usual expectations that investors may have
regarding the return on their capital.
2. A key element of family businesses, and thus businesses of people that
are married, is that the family provides cheap or free labour, below
market rates, in order to suit the needs of a growing business. On the
other hand, the income of the non-entrepreneurial spouse is often
regarded as the safety net that will protect the family from financial
problems in case the entrepreneurial activity suffers under temporary or
long term problems.
3. Since entrepreneurial activity embodies stress, spouses may offer
emotional support and help overcome frustration.
4. Being married offers in many economies benefits regarding taxation.
5. In general, entrepreneurs are older in age and older members of the
society tend to be married.
Of course, there are also some contradicting theories, of which the major one
suggests that married couples with children will probably opt for guaranteed
and stable income, rather than risky entrepreneurial opportunities.
In general, studies have demonstrated that there is a positive correlation

between entrepreneurial activity and marital status.

1.3.2 Health and Disability

It has been argued that people who need to build their career around a
significant personal issue, such as long term health problems and
disabilities (physical or mental), will choose self employment. This is
because they can set up their daily schedule taking into account specific
restrictions of time, place and activity. Also, in certain societies, employer
discrimination regarding health and disability might be that dominant in the
market, that people suffering from illnesses or having visible disabilities might
be excluded from it. It is also notable that government policies (especially in
the European Union) which aim at alleviating such discrimination, focus both
on employer benefits when hiring disabled individuals and self-employment
subsidies for people with adequate or specialised knowledge.
On the other hand, it has been shown that self employment can be
demanding in time and effort, and thus a growth oriented entrepreneurial
activity might be the wrong choice for individuals that face physical or mental
constraints. Moreover, health problems and disabilities might force the
individual to pause his or her career for extended time intervals and put
significant amount of money in dealing with health issues associated with their
condition. Self-employed people have to take care of themselves, while
employees are taken care of the employer and the public social and health
systems.
Studies have not managed to demonstrate a specific correlation between ill

health or disability and entrepreneurship. An explanation might be that self
employment and entrepreneurial activity, under these personal health
circumstances, might be different among several industries and varying
disabilities.
1.3.3 Age, Education and Experience

As with marital status discussed previously, older and/or more experienced
individuals are likely to become entrepreneurs, because:
1. The higher the age of an individual, the more likely he or she will have
developed an adequate network of other individuals that will supply
resources for the entrepreneurial activity. Moreover, through these

networks, entrepreneurial opportunities become identifiable and

accessible.
2. It is expected that as a person grows older, capital is accrued that can
be used to finance and support a start up. Such capital, both in the
form of money as well as intangibles (knowledge, experience, networks
etc), comes from personal work, relation to other people and
inheritance. Many entrepreneurs have been recorder to kick off their
career as employees, and to switch to self employment later on.
3. In cases of mandatory retirement, early retirement schemes or
downsizing, older people are keener on using self employment as a
way out.
4. Retired individuals might not want to stop working, for both personal
and financial reasons. Therefore, as they dont have the physical
endurance or mental ability required for employment, they might
choose self employment, in order to set the pace and personally
manage working hours.
On the other hand, older individuals might be less risky and willing to pursuit
entrepreneurial opportunities, than younger ones. Moreover, as high potential
entrepreneurial activities require long hours and increase work related stress,
older individuals might not be able to cope under such conditions. So, several
descriptive studies across the globe show that self employment (and mainly
start ups) is situated under normal circumstances around the midlife of the
workforce. Also, there appears to be a difference among the willingness
to become self employed and actually becoming self employed.
Blanchflower, Oswald and Stutzer (2001), identify that the interest in self
employment decreases as age increases, as the actual self employed
increase as age increases. However, a key issue regarding this approach to
entrepreneurship is how one describes and measures experience, as it is not
straight forward that experience is linked to age. As far as experience is
concerned, it has been identified that previous self employment experience
(even failure) is positively correlated to the willingness to pursuit self
employment later on in life.
The counterpart of experience, education, appears to have an ambiguous

relation with entrepreneurial activity, too. If one considers education as an

investment, it is obvious that the more an individual invests in his or her
education that more returns will be expected. Although entrepreneurial activity
might offer significant returns, these will probably come after several years of
low income. On the other hand, well educated employees will probably start
off their career with higher salaries and will experience the return on their
investment much faster. However, better educated individuals will have better
market information and will be able to identify business opportunities.
Moreover, educated professionals and highly skilled craftsmen are more likely
to be able to support a self employment activity, through the uniqueness of
their learned skills. However, it is not said that within formal education (no
matter how high the level) the individual will receive the necessary knowledge
to pursuit and manage an entrepreneurial venture. Hence, although many
scientists develop new products through research within their education, they
usually associate themselves with businesspeople in order to market the
product. It is also notable, that entrepreneurs from older times are rather
different in education from the modern ones. Entrepreneurs that established
their businesses sometime in the middle of the 20th century (especially in
Europe after World War II) are sometimes not educated at all or have intense
education regarding their craft. On the other hand, modern growth oriented
entrepreneurs have invested time and effort in their education and also try to
gain the necessary business knowledge, in order to run their business. In
general, studies display contradictory results and a direct relation between
education and entrepreneurial activity is not identified. The findings appear to
be industry specific.
1.3.4 Family
The family as a social construct is the channel through which society passes
its values, beliefs and overall cultural elements on to its younger members.
Apart from the societal value system, family is argued to offer role models and
secondary experience to the children. Parents, grand parents and close
relatives demonstrate through their life choices the effects and results of
choices. Hence, the role of family in entrepreneurship appears to be crucial, in
that it transfers from one generation to the other explicit experiences
regarding work ethics and career choices. One could identify two key

elements that incorporate the transfer of experiential learning, parental self

employment experience and business success (Dunn and Holtz-Eakin, 2000).
So, if one could argue that entrepreneurship runs in the family, it is highly
probable that the experience the parents made with self employment was
positive and inspired the children, offering a promising and rewarding goal. On
the other hand, negative entrepreneurial experience (not necessarily finance
related, but also possible negative effects on the family life and the individual
health), might drive the children away from the self employment career option.
In general, self employed parents offer their children a broad spectrum of
business management knowledge, capital management and the
understanding of risk. This informal schooling might not even be planned, but
incorporated in the family life through activities such as the Sunday family
dinner. Moreover, if a business exists in the family that might be passed on to
the next generation, children are more inclined to self employment and might
strive to prove their ability to inherit the family business. Finally, the existence
of a successful business in the family, might secure the essential capital
needed to start a new venture by the children.
1.3.5 Unemployment
Research on entrepreneurship has been looking for a correlation between
unemployment and entrepreneurial activity. Considering unemployment, it is
important to differentiate between structural unemployment that comes from
major changes in an economys industry and frictional unemployment that
includes those individuals that are between jobs. Governmental policies have
been attempting to reduce structural unemployment by offering subsidies for
and supporting self employment, and fostering what is called the enterprise
culture or the entrepreneurial mindset. On the other hand, other
governmental policies that include subsidies to business for employing
people, attempt to reduce frictional unemployment. Hence, it becomes clear
that unemployment rates are negatively correlated with entrepreneurial activity
and this is why governments need to intervene. It has been shown that being
unemployed does not mean that the individual will pursuit a career in
self employment, especially when the social system offers significant support
to the unemployed and their families. The debate on the entrepreneurial

propensity of the unemployed is closely related to the one of entrepreneurship

of need relative to the one of opportunity, discussed further below in the text.
1.3.6 Regionality
A further point of interest for the scholar of entrepreneurship is that
entrepreneurial activity displays a regional variation. Even within cities,
some areas appear to be more entrepreneurial than others, wider
geographical areas have more per capita self employed and some countries
are more entrepreneurial than their neighbouring ones. Over time, several
answers have been offered to explain this phenomenon. These include the:
level of workforce education,
accessibility to resources and markets,
tradition and role models, and
availability of capital.
Moreover, it is essential to differentiate between rural and urban areas, since

in each of them different types of entrepreneurial activity are feasible,
especially when one takes into consideration the population movement from
rural to urban areas. This is also supported by governmental subsidy policy,
through which entrepreneurs in rural areas are entitled to more funds than
their urban competitors, in order to retain human capital in such areas.
1.3.7 Immigration and Ethnic Minority

Ethnic minority entrepreneurship is becoming day after day more important for
policy makers and researchers in the area of entrepreneurship. Immigrants
and ethnic groups within a society appear to behave differently in regard to
venturing than the main culture of the host country would suggest. For many
years ethnic groups have been forming minorities in the developed
economies, such as the USA, Australia and Germany, and nowadays a new
influx of immigrants is shaping a more diversified economic population in the
rest of the western and developing countries. Also, in most post-socialist
economies of Eastern Europe and Asia, due to population movements and
unclear turf dissemination, significant ethnic groups find themselves in now
independent countries. Hence, for Europe and all the developing countries
that are in the wider European and Asian continent, immigrants and ethnic

groups offer a significant input to the local and national economy.
Entrepreneurial theory assumes that immigrants and ethnic groups are

attracted to entrepreneurial activity as a way to economically advance and
avoid poverty (Sanders and Nee, 1996). Also, it is widely suggested that
immigrants and ethnic groups suffer under employment discrimination, both in
form of social discrimination and in form of the inability to work legally (many
financial immigrants reside illegally in the country that hosts them). As far as
an indication is concerned on where the current situation is leading, one might
look at the USA, where immigrants have been a key economic growth tool. In
this country, ethnic groups that belong to non-black groups such as the
Chinese, Pakistani, Greeks, Italians have self employment rates that exceed
the average of the total USA population. This however does not hold true for
all ethnic groups, and therefore the assumption can be made that self
employment propensity is related to the immigrants culture and level of
employment discrimination. In countries that ethnic minorities have become
an issue of importance recently, ethnic entrepreneurship takes mainly two
forms. The first one is related to services and overall entrepreneurial activity
that focuses on members of the ethnic group, such as food markets,
restaurants, telecommunication, money transfer systems, leisure and
entertainment, and other services. A possible explanation for this is the social
discrimination that ethnic groups face, which does not allow them to either find
products and services or take part in the daily activities of the host countrys
dominant culture. The second form deals with jobs and activities that the
members of the local workforce are not anymore willing to do. These jobs are
usually related to manual activities, such as builders, farmers, cleaners etc.
Also, specialised skills not found in the workforce of the host country, such as
cooks or translators, become a competitive edge for immigrants.
Economic literature refers to different types of factors against ethnic groups

that might affect both positively and negatively ethnic entrepreneurship:
Employer discrimination.
Access to capital discrimination.
Consumer discrimination.
Positive returns on entrepreneurship (relative to employment).

Ethnic enclaves and geographical clusters where the specific ethnic

minority is denser than elsewhere.
The entrepreneurial propensity of the culture of each ethnic group.
The existence of role models.
Finally, it is suggested that immigrants are more likely to become

entrepreneurs compared to native workers, for the following reasons:
Immigrants tend to be more educated than native workers, especially of
developed countries. Mainly because education in developing countries
is considered a way out of poverty.
Immigrants have a secured market to sell their products and deliver
their services. Also, they have better access to ethnic resources and
social networks.
Many immigrants intend to return to their home country after they have
accumulated some wealth, and entrepreneurial activity appears to be
the best way to achieve this goal.
Immigrants face problems with cultural assimilation, communication,
discrimination and/or professional accreditation that is not valid in the
host country.
Immigrants tend to be risk-takers, if taken into account that leaving their
home country is an action that involves itself high risk.
In cases of illegal immigrants, self employment often avoids detection
by authorities.
Immigrants tend to join occupations and industries that have
themselves high levels of self employment.
1.3.8 Female Entrepreneurship

It is generally accepted that differences exist in all societies on how male and
female workers earn their income. In employment, we often refer to the glass
ceiling which does not allow women to achieve senior positions in a company,
in contrast to their male counterparts. Also, it is of common knowledge that
women tend to earn less than their male counterparts for similar jobs. The
same is valid for self employment. Fewer women are self employed and
entrepreneurially active than males. Also, women appear to be
entrepreneurially active mainly in the services sector, with some industries still

being dominated by males. So, female entrepreneurs are mainly focused on

sales, personal, financial and other services. On the contrary, female
entrepreneurs are not found in industries such as construction. In Europe,
rates of female entrepreneurship range from 20% in the UK to 40% in
Belgium. In most developed economies, female self-employment is increasing
rapidly and faster than male self employment. It is suggested that this has
both to do with societal acceptance of females as economic agents, as well as
the fact that developed economies tend to focus on service sector activities,
as they outsource more traditional ones. Hence, since female
entrepreneurship is higher within the services sector, moving from production
to services enhances their entrepreneurial potential, too.
Goffee and Scase (1987) published a research performed in the UK that

looked into the key differences between female and male entrepreneurship.
They suggest that there are two main influences on female entrepreneurship.
Firstly, they refer to entrepreneurial ideals, that incorporate the role of
women in the economy and which has been for many centuries a supportive
role to the choices of their partner. In this sense, women have been for
centuries domestically active and only in the last years have been allowed
social norms to earn money themselves. Secondly, female entrepreneurial
propensity is affected by the extent to which women themselves adhere to
conventional gender roles. These two parameters become of special
importance when imposed to different social and religious backgrounds. In
this direction, it is also essential to note that child care and household
activities are also related to females in modern societies and therefore affect
both the extent and scope of female entrepreneurial activity. In cases of heavy
household burden, self employment can be the solution for female workers
who cannot be full time employed.
As a final note on female entrepreneurship, it is of importance to underline the

fact that when measuring female entrepreneurs, one has to differentiate
between real and dummy female self employment. By dummy we refer to
the fact that in many countries, although the male partner is running the
business, as far as authorities are concerned the female partner is the owner.
This happens for a variety of reasons, such as taxes, legal aspects and social

security benefits. In many of these cases, women have no say in what relates
to the business and in some extreme ones, they even might be harmed
financially and personally by their husbands business choices.
In general, female entrepreneurs face following issues:

Discrimination.
Time flexibility (child care, household etc).
Household contribution of the partner.
Education potential and education barriers.
Relative earnings and demand for female workers in the market.
Less self employment income than their male counterparts (Aronson,
1991).

1.4 Macroeconomic Factors

Apart from the economic perspective, the psychological theory, and other
personal, family and social issues, there are some macroeconomic factors
influencing entrepreneurial activity. These factors differ from the preceding
ones through the fact that they are driven by man. Decisions on economic
development, industrial structure and government policy result from planned
human activity, and directly affect the parameters discussed in the personal,
family and social issues part.
1.4.1 Economic Development

Economists have been trying to relate economic development to
entrepreneurial activity. However, apart from several theories, empirical
findings do not allow us to draw any definite conclusions on the connection
between overall economic development and any aspect of entrepreneurship.
It is important though to identify the three different ways in which economic
development is facilitated. These are:
1. Growth of capital stock.
Capital is one of the key elements of entrepreneurship, and when more
capital is available it is assumed that entrepreneurial activity will be
facilitated.
2. Technological progress.
Technological progress is imported as well as endogenous to the
entrepreneurial activity. New technology is some times adopted by the
entrepreneur, while in other instances developed through the
knowledge base that is established by past entrepreneurial activity.
3. Endogenous increase of personal wealth.
In the case that the entrepreneur or the worker will accumulate wealth
from own work, it is expected that this wealth will be directed to new or
further entrepreneurial activity.
1.4.2 Industrial Structure

As policy or economic development change an economys industrial structure,
new work patterns arise. Demand for different kind of education, skills and
work force characteristics in general arises. In this sense, entrepreneurial
activity is affected when economies move towards service based

structures. Self employment and entrepreneurial activity is more prevalent in

the service sector, mainly due to the low entry barriers and initial investment
requirements. In general, structures including one to one labour intensive
personal services, seasonal jobs and jobs that require varying skills attract
higher entrepreneurial activities. So, manufacturing and industrial activity
attracts the lowest rates of self employment.
In many cases, changes in industrial structure of a countrys economy result in

structural unemployment, which in turn has an effect on entrepreneurial
activity (as depicted previously).
1.4.3 Government Policy

Governments, especially the ones of developed and developing countries,
take several decisions that indirectly or directly affect entrepreneurial activity.
One major issue is the extent of employment protection. In terms of
employment protection we refer to minimum wages policy and the ability of
the employer to terminate contracts with employees. When there is no
minimum wage policy and employees are not protected by law, it is highly
possible that some will turn to self employment, since the opportunity cost is
lower. On the other hand, a strict minimum wage policy and employee
protection law will push people towards employment. However, in this case
employers are less willing to employ people, since costs are higher and not
flexible, and might rely on extended working hours or part time employment to
deal with increased demand periods. This is especially true for highly
seasonal industries, such as tourism. Hence, strict minimum wage and
employment protection policies are considered as barriers to entrepreneurial
development.
Retirement policies, especially from the public sector, often lead people to
self employment. This occurs partly for income reasons and partly from
situations where retirement incentives to leave the service are given to young
individuals. In such cases, partial retirement is a way of continuing work. If
however, the welfare state is larger and pensioners can live optimally and
according to their needs, self employment rates are lower.

Interest rate policies affect mainly financing options within the economic
system. Higher rates will make borrowing more expensive and slow down
entrepreneurial activity, while lower ones will enhance capital investment.
Also, higher rates will push people to saving money, rather than spending
and, hence, businesses that offer non essential goods or services will
experience a drop in sales. Several studies have shown a negative correlation
between interest rates and self employment. Moreover, when interest rates
increase, less new businesses are established and firm deaths increase.
In recent years, governments in Europe have been looking towards

entrepreneurial activity in order to solve structural economic problems.
Starting with the UK and what was named enterprising culture and ranging till
today, governments are trying to enhance new firm creation, in order to lower
structural and regional unemployment through new employment opportunities
within the growing new firms. In this direction, the EU has been offering
incentives for firm creation and growth, firm networking, and research and
development. These initiatives have been focused on sectors that are different
in each country and theoretically enhance the national competitive advantage.
These policies are further supported by de-regulation initiatives in areas that
have been governmental monopolies for many years, such as energy,
telecommunication, transport etc. More on the policies that support
entrepreneurship will be discussed in the material prepared for the second
part of this course.

1.5 A Final Look at the Entrepreneur

In order to summarise the above literature on entrepreneurship and the
entrepreneur, it is useful to look at two models that manage to categorise
entrepreneurs. These more realistic and empirical models, might offer the
opportunity to link lived experiences with the theoretical background offered
above.
Firstly, Webster (1977) offers four broad categories of the individual

entrepreneur, several of which are analysed later in this text:
Cantillon Entrepreneur (the one that brings resources together).
Industry Maker (establishes a new industry).
Administrative Entrepreneur (Intrapreneur).
Small Business Owner.
Moreover, Webster also suggests a similar segmentation of entrepreneurial

ventures:
Large Payoff Venture
A business where the expected results are significant and therefore
many participants share risk and income.
Large Payoff Venture
The same as previously, with the risk taken however by few key
investors.
Small Payoff Venture
A business where the expected results are moderate and therefore
only a few investors participate.
A second approach is the one of Landau (1982), who derived the matrix
shown below, which adopts a description for each entrepreneur relative to
risk and innovation levels:
Gambler (High Risk Low Innovation).
Consolidator (Low Risk Low Innovation).
Dreamer (Low Risk High Innovation).
Entrepreneur (High Risk High Innovation).

Figure: Landaus Classification of Entrepreneurial Types
Finally, in order to answer the practical question that is of importance at the

final stage of this analysis, the reader should be able to identify different types
of entrepreneurs depending on their background. The understanding of this
will offer the opportunity to move on to more in depth reading in the field of
entrepreneurship and a more clear view of the forces that bring people to self
employment and entrepreneurial activity. According to Wickham (2001), the
following types of entrepreneurs can be found in the market:
the inventor and technical innovator,
the unfulfilled manager,
the displaced manager,
the young professional, and
the excluded: e.g. ethnic or minority entrepreneurship.
In order to draw a real-life parallel of these theoretical approaches to

entrepreneurship, the reader can find below a variety of statistical evidence on
entrepreneurship. This evidence refers to the European Union and is part of
the Eurobarometer on entrepreneurship published by the European
Commission in 2004. Each table refers to specific questions that were put to
the surveys sample. It is highly advisable for anyone interested to explore
such data and read the full report.

Figure: Evolution of Employment Choice over Time; EU and USA
Figure: International Variance of Employment Choice

Figure: Detailed National Variance of Employment Choice

Figure: Sample Variance of Employment Choice
Figure: The Reason behind Choice of Paid Employment

Figure: The Reason behind Choice of Self Employment
Figure: The Actual Intention of Becoming Self Employed

Figure: The Feasibility of Becoming Self Employed
Figure: The Main Risks as Perceived by Future Self Employed

Discussion Points:
Which economic approach to entrepreneurship do you consider to
be the most adequate and why?
How do you identify the role of entrepreneurship in the economy
throughout the years, based on the evolution of theory?
Do you accept the psychological traits approach as a valid
theoretical background to entrepreneurship? Can you give explain
your answer by practically applying this theory to a well known local
entrepreneur?
What is your attitude towards risk taking and how does this relate to
your cultural and family background?
Why would your government want to support entrepreneurship in
your country and how would you as a policy maker decide to
support it?
What effects on the national economy result from increasing female
entrepreneurship and self employment?
What is the industrial structure of your local economy and where do
you think that entrepreneurial opportunities lie?
What is the ethnic minority status in your country and how do
existing minorities act entrepreneurially?

2. Introduction to the Entrepreneurial Process
Understand the levels of change that entrepreneurship makes.
Identify the components of the entrepreneurial process.
Understand the concept of the entrepreneurial mindset.
In the previous part we discussed the theoretical background of

entrepreneurship and many of the aspects that researchers have looked into
regarding its complications. In order to offer a better understanding of
entrepreneurship at this point, it is essential to briefly present the main
elements of the entrepreneurial process. A more detailed and practical
analysis will be discussed within the material of another Part of this course.
2.1 The Drive behind Entrepreneurial Change

The entrepreneurial process is the mechanism through which the
entrepreneur receives the return on his or her investment. It needs the input of
a variety of elements, in order to add value on the initial materials and deliver
an output. In this sense, the entrepreneurial process is the mechanism by
which the entrepreneur bridges the gap between the current situation and
what is considered possible. This is the way an entrepreneur brings about
change and makes a difference in the market. As a result, even in small
entrepreneurial projects, the entrepreneurial vision is the key element in
exploiting innovation in order to produce value that is not solely financial.
Hence, the entrepreneur situates his venture within a process where tension
escalates between the actual and the possible. This tension has three key
dimensions: financial, personal and social. Firstly, entrepreneurship is an
economic activity and is mainly concerned with creating stable, growth-
oriented and profitable businesses. These businesses need to secure
financial resources, in order to survive within their competitive environment
and to increase the value of the overall market by exploiting an opportunity.
So, the first dimension relates to the value creating potential. Secondly, the
entrepreneur needs the potential to persist and achieve personal goals. In this

dimension, the entrepreneur is driven and motivated by a variety of factors

wealth creation being just one of them that differ from individual to
individual. In several occasions, the force behind the personal potential to
achieve might not be the target, but the process. Thirdly, as the entrepreneur
operates within a social context, there is both a positive and negative force
towards the change he or she wants to drive. Therefore, a degree of social
responsibility is essential, in order to bridge the gap between the actual and
the possible. In several occasions, society is not ready or willing to follow the
entrepreneurs lead.
The TENSION The

Actual Possible
Figure: Tension in the Entrepreneurial Process
2.2 The Entrepreneurial Process

At the centre of the entrepreneurial process, is an individual. The entrepreneur
is the agent of change and the economic factor that adds value to the
production chain through the exploitation of an opportunity. As numerous
theories suggest, the entrepreneur combines a variety of other factors in order
to increase his or her wealth. These other factors apparently coexist in the
business environment, but no other person has realised their combined
value or has not managed to combine them properly. This is why the
entrepreneurial process is not the same in every case. However, it is essential
to identify three key elements that the entrepreneur needs to put together in
order to deliver change and experience success. This means that, in order to
have an entrepreneurial process, opportunity, resources and organisation
need to be co-existent with a person that will facilitate the overall process. In
some cases, the entrepreneur might be a group of people with different roles.
Such groups could be family, friends or partners.
Firstly, the entrepreneur needs to identify opportunity. A simple and

straightforward definition of opportunity is that it is a gap left in the market.

Due to this gap, there is potential for wealth creation, by catering for the needs
of customers that are either not fully or not at all served. The opportunity lies
within a variety of things that could either be absent from the market or that
could be done in a different way. The concept behind the opportunity is the
idea, so often referred to by successful entrepreneurs. In order to be
successful though, the other people in the market, suppliers and customers,
need to understand and welcome this idea.
Opportunity
Identification
The
Entrepreneur
Attraction & Leadership &

Management Direction
Resources Organisation
Figure: The Entrepreneurial Process
Secondly, after the opportunity has been identified and the idea
conceptualised, the entrepreneur needs to lead and direct. This is why one of
the key attributes of the entrepreneur is managerial ability, which
characterises the way he or she co-ordinates different people. Also, the
entrepreneurial process usually suffers under limited resources and the
inherent risk of something new in the market requires the best combination of
what is at hand. Otherwise, though the target might be reached, the business
might experience problems related to capital and cash flow management.
Hence, the type of leadership each entrepreneur uses in order to manage the
business, affects directly its future. Usually, charismatic leadership is needed
to motivate employees and enhance trust as far as suppliers and customers
are concerned. The scarcity of resources also forces entrepreneurs to work in
networks and support each other in difficult times. These network

relationships can be formal or informal, based on exploitation or altruism, and

have long or short term potential.
Thirdly, in order to realise the opportunity and materialise the idea, the
entrepreneur must be in the position to acquire the necessary resources.
Resources include money, people, knowledge and skills, and materials.
Resources can be tangible and intangible, such as name, reputation and
customer trust. In order to exploit these resources, the entrepreneur needs to
attract capital of any form that will guarantee their availability. As mentioned
before, resources in the entrepreneurial process tend to be scarce and,
therefore, apart from acquiring them the entrepreneur needs to exploit them
cautiously.
So, in order to have an entrepreneurial process, we need three co-existing

factors and a facilitator the entrepreneur.
2.3 The Entrepreneurial Mindset

As mentioned above, three elements of the entrepreneurial process need to
co-exist so that the entrepreneur can bring about change. So, in the first
instance what is required is the existence of an individual that can
recognise opportunity, direct an organisation and acquire resources.
This individual will become an entrepreneur in the moment the decision is
made to combine the three elements. For a society therefore that is looking to
be entrepreneurial and to experience economic growth through individual
innovation, it is important to cultivate the entrepreneurial propensity of its
members. What is needed is a significant amount of latent entrepreneurs that
will become active the moment all three elements co-exist. This way, the
society secures that no opportunity will be left unexploited and, therefore,
growth through entrepreneurial activity will be boosted.
Looking at the person that is needed to facilitate the combination of

opportunity, organisation and resources, it is easy to identify the difference
between a manager and an entrepreneur. The manager is probably good at
organising and leading, and knows how to realise goals with given resources.
The entrepreneur, apart from being a good manager, needs to be able to

identify, screen and exploit opportunities. He or she needs to formulate ideas

from opportunities that others cannot see into an effective and realistic
business plan. An entrepreneur needs to walk on the clouds and, at the same,
time be realistic. This ability to dream and materialise these dreams is what
one could call the entrepreneurial mindset.
McGrath and McMillan (2000) offer several characteristics of this

entrepreneurial mindset:
Passion in seeking new opportunities.
Discipline in pursuing these opportunities.
Correct choice of the best opportunity to pursuit.
Focus on execution (adaptive execution).
Involvement of a significant number of other individuals.
In different countries different levels of entrepreneurial propensity and activity

can be found. In some countries more people claim that they want to be self
employed than actually are. In others it is quite the opposite. Also, in some
countries self employment and entrepreneurial activity is the result of over-
optimism. Hence, what an economy needs are people that will actually
become entrepreneurs by calculating the true level of risk. In order to have
this, the notion of entrepreneurial mindset needs to become a key ingredient
of the societys culture. This can be achieved mainly through education and
role modelling, an effort that has been successful in countries such as Ireland
and the UK. Especially in transition economies, where the notion of private
economic activity has not been part of the culture for many years, cautious
steps need to be taken in order to produce the proper entrepreneurial mindset
among the younger generations. When the entrepreneurial mindset is
optimised, then the government can enhance entrepreneurial activity by
subsidies and supportive measures. The entrepreneurial mindset can be
considered the backbone of the enterprise culture.

Discussion Points:
What are the forces behind entrepreneurial activity? Identify two or
more entrepreneurs and consider which is the most strong for each
one of them.
How would you schematically present the entrepreneurial process?
How does it interface with other items of the economic activity?
What could be the barriers to the entrepreneurial activity? How can
they be overcome?
How do you describe your personal entrepreneurial mindset in
relation to the one of your country?
What is the role of education in shaping the entrepreneurial
mindset?
What type of practical support and instruments should be given to
schools to encourage entrepreneurship activities?

3. Entrepreneurship of need vs. of opportunity
Differentiate between entrepreneurship of need and the one of
opportunity.
As mentioned in the previous chapter, in order to have an entrepreneurial

process we need four factors to co-exist. The key one is the entrepreneur, the
individual that feels the need to pursuit the opportunity, organise the process
and attract the resources. The force behind this need to do these three things
is not always easy to understand. Obviously, for an individual to be willing to
take risk there must be a significant force behind this decision, in order to
overcome the resisting ones. In this chapter we will try to differentiate between
two kinds of forces.
The first one is the force that pushes the entrepreneur to undertake risk.
In this case, the entrepreneur has no obvious reason for pursuing an
opportunity other than to increase his wealth and become successful. Hence,
the individual is in a position that is not unfavourable for him or his family and
when an opportunity presents itself he or she decides to pursuit it or not. In
such cases, the risk is sometimes greater, because the individual trades a
rather secure financial and personal situation with a risky attempt to achieve
more. Apart from financial reasons though, this force might also stem from a
need to achieve something, fulfil ones dreams, be successful, etc. So, we call
this entrepreneurial activity as one of opportunity, since the entrepreneur
does not necessarily need to do something different than he or she is doing at
that point.
On the other hand, we have a force that pulls the entrepreneur towards
risk. Such cases result from a variety of reasons that make an individual
become self employed, because there are no other alternatives. The reasons
an individual has no other choice vary. On one side we have strict economical
issues, such as satisfying basic needs. On the other hand, one could also

include in this case feelings of un-fulfilment, lack of interest or disappointment

in general. The latter ones however not being so essential to the survival of
the individual. Economic issues usually relate to employment discrimination
and are the direct result of the fact that the individual has no way to earn his
or her living. Therefore, self employment is the only choice that remains for
the individual to cater for personal and family needs. So, this kind of
entrepreneurial activity reflects the need of the entrepreneur to reverse the
financial situation under which he or she suffers. People that experience
employment discrimination might belong to one of the following groups:
Women.
Unemployed due to structural changes in the industrial profile of an
economy.
Convicts that return to normal life after prison.
Former drug addicts.
Individuals with mental or physical disabilities.
Ethnic groups and minorities.
Religious minorities.
Illegal immigrants.
All these groups have in common the fact that they include people with similar
problems, which do not allow them either to be accepted by other members of
the society or have specific needs regarding their employment. The problems
might stem from communication compatibility, lack of skills, past wrongdoings,
cultural bias, racism etc. Apart from people that belong to one of the above
groups, there are also individuals that have no apparent reason to experience
employment discrimination, but might still suffer under it. Finally, in several
economies there might be situations when the majority of the society is facing
employment issues and is therefore forced to earn their living in another way.
Such situations include the collapse of economic activity or post-war periods
where the entire infrastructure is destroyed. Such periods include the great
depression in the USA in 1929 or the post-war era of the European continent.
Turning to self employment in case of need will usually lead people to grow
their business up to a point. This point is defined firstly by the amount of

capital they can invest and secondly on their personal aspirations. In the first
case, it can be expected that an individual experiencing employment
discrimination will have the same problems in attracting capital. In the second
case, when the business is up and running, growth might not be the key
objective of the entrepreneur. In most cases entrepreneurs of need will set a
goal of income that would relate to the salary they would expect from
employment. Hence, another key difference between entrepreneurship of
opportunity and the one of need is, apart from the starting point, the final goal
of the entrepreneur. In the former it will be growth and accumulation of wealth,
while in the latter it might be restricted to earning an honest living. Hence, we
would be rather discussing small business management than
entrepreneurship. Of course this is not limiting, since the goals in each case
are related to the capacity of the individual entrepreneur.
Finally, employment discrimination and entrepreneurship of need might lead

their subjects to illegal business activities. The illegality of these activities
might range from not paying taxes or registering the business, to pursuing
illegal opportunities per se, such as selling drugs, trafficking, violation of
copyright laws, etc.
Discussion Points:
Do you think that entrepreneurs of need have a different approach
to business management than those of opportunity?
Can an entrepreneur of need introduce significant innovation in a
market or is he or she restricted to small scale projects?
Can you identify a period in your nations history, when all economic
activity was stopped? Did any well known entrepreneurs emerge at
that time?

4. Serial Entrepreneurship
Understand the concept of serial entrepreneurship.
Identify different forces behind serial entrepreneurship.
Explain the choice of an entrepreneur to become serial.
Classify serial entrepreneurs according to their choices.
In several economies it is possible to locate entrepreneurs that appear to be

more active than others. Such entrepreneurs might be starting one business
after the other and expanding their risk taking constantly. Such entrepreneurs
are considered to be serial. Behind the choice of serial entrepreneurship one
can find a variety of driving forces that can be split into two main groups. The
first one includes entrepreneurs that follow a strategic path to increase
their wealth by including in their activities complementary or other
businesses. In this case new ventures are set up to facilitate the key idea
behind the initial one and the whole process is part of an overall
entrepreneurial vision. The second group includes entrepreneurs that,
according to the psychological traits theory approach, are motivated mainly
by other rewards than money and they feel great satisfaction is setting
up businesses.
Following the above, we can define two sub-groups of serial entrepreneurs.

The sequential entrepreneur will start a business; bring it to a point and then
move on to start the next one. In essence, they handle one business at a time.
These people appear to be enjoying the process of opportunity exploitation
more than running an established business. Many explanations can be
offered, ranging from the adrenaline rush of risk taking to the fact that an
individuals competitive advantage is setting up businesses. In any case, the
serial entrepreneur will set up the business, fine tune it and then sell it, using
the proceeds to start his or her new project. In this context, there have been
suggestions that when a business is set up and running, the actual
entrepreneurship phase is over. The portfolio entrepreneur will, on the other

hand, retain management and ownership of his established ventures and

move on to create something new. These serial entrepreneurs follow an
overall strategy for growth and may have vertical or horizontal expansion in
mind. Also, increasing the entrepreneurial portfolio might even be the proper
way to handle risk, by spreading it across different activities with different
threats.
The special skills needed for serial entrepreneurship are all included in a well
established entrepreneurial mindset: Opportunity recognition and evaluation,
market analysis, customer insight, securing of capital and decision making
ability. This might be the case why some entrepreneurs choose to be
sequential ones. On the other hand, portfolio entrepreneurs exist in cases in
which the initial idea, the core business concept, is applicable to more than
one products, services or even industries, and hence the opportunities appear
to be endless.
Overall, Wright et al. (1997) classified serial entrepreneurs as follows:

Defensive serial entrepreneurs, who might be forced to exit the initial
market they were in. Reasons could be failure, market saturation,
floating of the business etc.
Opportunist serial entrepreneurs, who are going after the financial gain
of the start-up process and are probably short-term oriented.
Group-creating serial entrepreneurs, who follow a strategy that includes
more than one business. One could separate between those who make
deals and buy other businesses and those that create each time the
business they require to pursuit their strategic outlook.
It is important to underline at this point the overall importance of failure in the

entrepreneurial process. As risk is inherent in all entrepreneurial activity, the
possibility of failure is an option for which all entrepreneurs need to be
prepared for. In general, failure has a different meaning in each culture and
economy. Some cultures embrace failure and understand its value. In order to
fail one must try, and by trying the entrepreneur is both aiming at a better
tomorrow for him or herself and at the same time will return a part of his

earnings to the society. In other cultures failure is not that well received and
entrepreneurs that failed once have a difficult time getting on. In serial
entrepreneurship failure is important because an entrepreneur that tries
something new after a failure might experience varying feedback. There are
investors that trust a failed entrepreneur more, because they consider that he
or she has learned a lesson. On the other hand, there are more formal
institutions, such as banks or even the state that will turn down any loan or
support to a failed entrepreneur. Also, the legal aspects of bankruptcy
determine a countrys attitude towards failure.
Finally, one identifies family entrepreneurship within the serial

entrepreneurship context, since in many cases proceeds from an initial
entrepreneurial activity are given as capital to the younger generation, in order
to pursuit their own opportunities.
Discussion Points:
Why would an entrepreneur want to be serial?
Why would an entrepreneur need to be serial?
Can you give two or more examples of entrepreneurs that have
chosen to be serial ones for different reasons?
Do you believe that the rush of the start-up or the diversification of
risk management is more appropriate to explain serial
entrepreneurship?
How do you perceive entrepreneurial failure in relation to future
business activity?

5. Entrepreneurial Networks
Describe formal and informal entrepreneurial networks.
Describe informal entrepreneurial networks and relationships based
on their characteristics.
Understand the value of entrepreneurial networks.
Having read the psychological traits approach to the entrepreneurial

personality, one could describe entrepreneurs as individualistic and
autonomous. However, in recent years, extensive research in the area has
developed a new aspect of entrepreneurship. Networks and networking has
become a prominent and important research target, in the attempt to better
understand the entrepreneurial process. As mentioned beforehand, the
entrepreneur has to manage an organisation that tries to exploit an
opportunity, based on scarce resources. These resources include, apart from
raw materials, capital, skills, knowledge, technology and other that differ from
business to business. Hence, formal and informal networking, or what is also
called social capital, plays a significant role in the success and growth of the
entrepreneurs venture.
It is difficult to define networks and networking, although most people

understand grossly what these words stand for. As a basis for discussion, it is
enough to define networks as constructs that are based on formal and
informal overlapping relationships of the business with its environment or
the entrepreneur with other individuals. Hence, networks are continuously
being set up by each new business that enters a specific market, and
therefore no network remains static. Each new member becomes related with
all the others through networking with members of other networks. It is clear
then, that a networking process has to offer a lot to an entrepreneur in terms
of receiving especially when one is prepared also to give. Networks are
primarily transactional.

The entrepreneur gains from his or her network a variety of things. At a

starting point, the entrepreneur might gain access to capital, information and
advice. Moreover, innovation can also be a result of networking, observing
other members of the network how they deal with or manage novelties.
Formal networks include professional bodies, chambers of commerce,
alumni associations etc. Informal networks are numerous and range from
close friendships to casual meetings with other entrepreneurs over dinner.
The benefits of formal networks are obvious, including lobbying and support,
while the informal ones offer a different support: extension of strategic
competencies, identification of opportunities, contribution to own resources
during extra ordinary situations. In this sense, it has been shown that
entrepreneurs that have difficult access to informal networks, have access to
less free information and are therefore forced to operate with less capital in
a broader sense than their peers (Leonard-Barton, 1984). In many cases,
entrepreneurs tend to get involved in informal networks even before they
establish their business, during the screening stage of the opportunity they
have discovered.
Key:
Participant in society: individual, household, group, organisation
Direct relationship shared between members in an interaction

Indirect relationship (influence) shared between members more than one
step away from each other
Figure: Example of a Social Network Map
In general, entrepreneurial networks have a variety of characteristics that

mainly deal with small firms and are briefly depicted below:
1. Morphological Characteristics (pattern and structure) (Mitchell, 1973):
a. Anchorage.

The focus of the network can lie on the business or the

entrepreneur, depending on the situation and the years of
existence of the business.
b. Reachability
The anchor of the network as described previously interacts
with the other elements within the social construct of the
network. The measure of how far and how easy this interaction
takes place is the reachablity. One can count number of
interactions within the network in order to reach the desired
network member. The fewer the interactions, the higher is the
reachability. In this sense, one can draw the boundaries of the
narrower and the wider network of a business and understand
the effort required to acquire resources that are available
through this network. Also, in such an examination, one can
identify the network members that link this network with other
ones.
c. Density
Networks can be tight or loose, depending on how close all the
members are with each other. In cases of networks in which all
members interact directly with all other members, the density is
at its highest values. On the other hand, if a network member
needs to go through several other members in order to reach the
objective, the network is considered to be loose. Dense
networks often result from family or friend networks.
d. Range
The range of an entrepreneurial network refers to the
heterogeneity of the members in direct contact to the anchor. If
multiple resources are available through direct contact we have
a diverse network, if not a narrow one.
2. Interactional Characteristics (perception of the relationships within a
network)
a. Content
Content refers to the meaning attributed to each relationship
within the entrepreneurial network. Each relationship has a

different level of intimacy and value for each member, and,

depending on these, the member is willing to interact differently
within each relationship. Labels such as family, friendship,
acquaintance etc describe levels of content.
b. Intensity
Again, each relationship has a different weight on each member
of the entrepreneurial network. This weight defines the
willingness to interact, respond to communication, honour
obligations and exercise rights that are given due to
relationships.
c. Frequency
Frequency measures the time entrepreneurs spend or invest
in order to interact with their networks and cultivate
relationships. It is important to note that frequency does not
necessarily affect the quality of exchange or the intensity of the
relationships.
d. Durability
As networks are dynamic and participation voluntary, durability
can describe the time a relationship lasts. If both sides consider
the relationship of value, there is a high probability that it will
last. This mainly depends on how much each side of the
relationship is willing to invest in it over time.
e. Direction
Direction refers to the flow of power within a relationship. One
member might be stronger than the other, and hence the weak
one receives support from the strong one. In entrepreneurial
networks direction might alternate over time or depending on the
issue, while in strong social relationships, such as friendship,
direction might not be of importance.
It is important to recognise how networks contribute to the entrepreneurial

process. Since no business exists in vacuum, it is essential to interact heavily
with its environment in order to achieve its goals. This networking process
might not be scheduled in many instances, though experienced entrepreneurs

try to include in their schedule time to interact with other network members.
Finally, it is important to underline that networks are of a reciprocal nature.
Each member receives and benefits from the network relationships, but needs
to offer, too.
1.1
Discussion Points:
Sketch a network of your family, friends and acquaintances. Identify
resources that you can access through your network in order to
achieve your goals.
Identify the formal business networks in your area and describe
their services and benefits for its members.

6. Intrapreneurship and Innovation
Differentiate between entrepreneurship and intrapreneurship.
Describe the enables and barriers of intrapreneurship within an
established organisation.
Up to this point, we have referred to entrepreneurship as an event, or a

process, that takes place outside all existing business establishments and
relates to a new venture. Having mentioned serial entrepreneurship as a
phenomenon of continuous entrepreneurial activity by an individual, it is useful
to also discuss intrapreneurship. Intrapreneurship refers to the ability of
larger and established organisations to act entrepreneurially by taking
advantage of their human capital that has a well developed and healthy
entrepreneurial mindset. In this attempt, larger businesses tend to move
away from bureaucratic structures and capture innovation at its source,
enabling the communication of latent entrepreneurial intentions within their
structures.
In every innovative larger business, such as 3M, General Motors and Yahoo!,
one can identify key employees that facilitate change and introduce
innovation. These individuals could be entrepreneurs themselves and operate
as change agents within the market. However, these businesses have
captured their entrepreneurial talent and rewarded it. Hence, instead of
experiencing the phenomenon of the dissatisfied manager, they introduce the
role of the intrapreneur. So, intrapreneurs are the entrepreneurs within
business constructs, who are given the resources to pursuit the opportunities
they have identified. Inherent to new venture creation are apart from risk
capital requirements, resource scarcity, knowledge and skills employment,
and other key elements depending on the situation. The individual will choose
to become an entrepreneur when he or she considers the opportunity costs
low and the prospective income significant enough to alleviate risk. In case of
intrapreneurial businesses, the entrepreneurial individual can pursuit

opportunities within an established organisation, using resources that are

easier to acquire than by a new venture, and is rewarded by his or her
employer for increasing the businesss value. In a sense, intrapreneurship is
entrepreneurship with a safety net. Therefore, returns might not be as big as
in entrepreneurial activities, but the risk is much lower, too.
Intrapreneurship can exist as a part of the organisational culture of a business

only if it is supported, embraced and rewarded. In order to enhance
intrapreneurship, businesses can employ a variety of tools:
Intrapreneurship sponsors.
Individuals that scout for innovation within the business and clear their
schedules in order to listen.
Continuous involvement of the initial intrapreneur.
In several organisations, the initial concept builder is gradually left out
as the project moves to more advanced stages. However, the
motivational power and devotion lies within the involvement of the initial
intrapreneur, who has to be present in all stages of the new project.
Autonomous intrapreneurial teams.
Intrapreneurial teams need to work as entrepreneurs. They must have
power over their resources and be free to decide.
Low level of bureaucracy.
The intrapreneur will need to access resources throughout the
organisation in all stages of the project; from idea conception to the
actual implementation of the idea. Hence, increased bureaucracy will
delay the process and might outdate the idea.
Acceptance of risk, mistakes and failures.
When investing in new projects, an organisation needs to be able to
face failure in the same way an entrepreneur would. This failure might
come from increased risk or mistakes by the intrapreneurial team. In
any case, if failure is punished, any intrapreneurial opportunities that
might exist or come to life in the future will be discouraged.
Devotion to a philosophy of long-term success.
Intrapreneurial activities might not present favourable results within the
time frames the organisation is used to. One idea might take longer to

become profitable than another. So, intrapreneurship requires time and

a long-term investment to flourish.
Existence of resources for ideas.
The intrapreneur and the intrapreneurial team will need resources. The
fastest access to these resources is allowed, the fastest the idea will
reach the market.
Reward system that supports intrapreneurship.
Any organisation that wants to enhance entrepreneurship and capture
innovation needs to have a supportive reward system. The intrapreneur
needs to be rewarded for his contribution, in order to encourage future
intrapreneurs to come forward with their ideas. Reward systems might
include short and long term pay benefits, education and health benefits.
On the other hand, barriers to intrapreneurship include:

The hierarchical structure of the traditional large business organisation
that has many separators between lower and higher levels of
management.
An unfavourable corporate culture that discourages communication and
flexible job descriptions.
Performance standards and measures that are suited for large
businesses, such as short-term profits or cost control.
Rigid and time consuming planning procedures.
Ownership issues.
Human resources mobility.
Ineffective reward systems.
Finally, in the same way that we attempted to identify the traits of the
entrepreneur in another part of this text, we can also do the same for the
intrapreneur. The latter has probably a proven record of managerial capacity
and a degree of entrepreneurial thinking. So, the intrapreneur differs from the
entrepreneur in two ways. Firstly, the intrapreneur is less of a risk taker and
might view the benefits of becoming an entrepreneur and exploiting the
opportunity on his own to be not worth sacrificing his or her career. Also, the
intrapreneur has an accumulated managerial experience that can be used in

the new project. Furthermore, the intrapreneur has the choice to become an
entrepreneur at any stage of his or her career, while the entrepreneur will find
a career change to be difficult. In terms of managerial skills, the intrapreneur
has the ability to adopt multiple roles, understand and evaluate the
environment, use open discussion techniques to resolve problems and
explore possibilities, challenge the organisational culture he is part of, and
build a group of supporters something like an intrapreneurial network.
Moreover, in terms of entrepreneurial skills, the intrapreneur needs vision and
flexibility, orientation towards action, dedication, failure management and
overcoming ability, and adoption of self set goals.
In essence, intrapreneurship as a concept is the same as the notion of

creating a society that captures innovation in any form. The social
entrepreneurial mindset, which represents the average ability of identifying
and exploiting opportunity, can be replicated within any large organisation.
However, a visionary manager may choose employees of an increased
intrapreneurial ability that will boost innovation within the business and make
the average entrepreneurial mindset of the group much higher than societys.
If innovation is not only considered technological, a highly intrapreneurial
business will opt for people of varying backgrounds and skills, who all can
identify opportunities and formulate new business concepts.
Discussion Points:
Identify an intrapreneurial organisation and explain how it captures
innovation?
How can one apply intrapreneurship in the public sector or local
authorities?
Why would you prefer to work for an intrapreneurial organisation
rather than start your own business?

7. Small and Medium Enterprises
Define Small and Medium Enterprises.
Understand their contribution and importance to the economy.
Understand their problems and key survival requirements.
Describe the differences of entrepreneurship and small business
management.
Although this text aims at understanding the basics of entrepreneurship, Small

and Medium Enterprises are an important supplement. Small businesses and
their management are not the same as entrepreneurship. However, all
entrepreneurs start either small or medium. No new venture kicks off at a
large size; it usually grows to be one if it is successful. Of course, exceptions
to this statement are serial entrepreneurs, who have though started small or
medium with their initial venture. Moreover, Small and Medium Enterprises
(SMEs) are the backbone of all free market economies. This is why the
agenda on such businesses is always topical and in the middle of any
economic reform or industrial restructuring. Finally, SMEs are not like larger
organisations, and they behave in a different way. One cannot claim that
smaller businesses are just large ones in another scale.
7.1 Definition
Historically, small businesses can be even found in almost all ancient cultures.
As self employment and venturing is part of the human activity, small
businesses appeared in order to satisfy customer needs; in the same way that
entrepreneurs enter a market. In 2100 B.C., Hammurabi, King of Babylon,
drafted one of the first laws on small business. Its main core was actually the
protection of consumers against fraud. SMEs have gone far from that period
of history, and are nowadays regarded as the solution to many problems of
the developed and developing economies. Especially during the 1980s and
1990s there was heavy debate on the future of SMEs and an understanding

that, if developed and developing economies want to prosper they will have to
support them. Following the demise of industrial production in the Western
World and the introduction of service based economies, larger organisations
and their problems led governments to understand the value of SMEs. A
result of this effort was the concept enterprise culture that has been at the
core of economic activity in several countries, such as the UK, Ireland, the
USA etc.
SMEs are broadly defined by using three parameters: employment, turnover

and characteristics. The initial SME definition was supplied by the Bolton
Committee (1971) in the UK, when the government financed a research
project, in order to understand the small business sector and identify
opportunities to resolve social and economic problems due to privatisation
and de-industrialisation. So, according to the Committees work, an SME:
employs less than 200 employees in manufacturing and 25 in
construction,
earns yearly less than 50,000 (at that time ), and
has a small share of the market, is managed by its owner(s) and
operates independently.
It becomes clear, that this initial definition contributed significantly towards the
understanding of SMEs. It revealed several issues of interest, such as
different employee numbers for different industries and different turnover rates
for each activity. Modern definitions are based on this initial one. However,
they have managed to resolve several problems regarding the better
description of a very large number of enterprises. Nowadays, the EU
considers SMEs in three different levels (as of 1/1/2005):

Table 1 EU Definition of SMEs as of 1/1/2005

Turnover
Employee or Characteristi
SME Type
s Balance cs
Sheet Total
2 million
Micro 0 to 9 or Autonomous
2 million
10 million
Small 10 to 49 or Autonomous
10million
50 million
Medium 50 to 249 or Autonomous
43 million
This definition allows for a better segmentation of the SME population, and
identification of issues that might be relative to one sub-group only. The
employee number or turnover (or balance sheet) threshold need to be valid, in
order to belong to a sub group. The characteristic of independence though, is
applicable to all businesses and states that no SME can be linked in any way
with another business. In order to consider an SME linked to another
business, the former will need to posses 25% of the latter or vice versa. The
definition goes into some other details, which are not considered crucial at this
point.
According to this definition, in the EU there are approximately 19 million SMEs

that represent 99.9% of the total of businesses and employ about 97 million
people. In the table below, a brief overview of the SME sector is presented,
comparing different sizes within the EU. Data is for the 19 members of the EU
in 2003, according to a European Commission (2004) publication on SMEs.

Table 2 Data on EU SMEs for the Year 2003

Micro Small Medium Total Other Total
SME
Number of
17,820,000 1,260,000 180,000 19,270,000 40,000 19,310,000
Businesses
% of Total 92% 7% 1% 100% (<0.25%) 100%
Total
55,040,000 24,280,000 18,100,000 97,420,000 42,300,000 139,710,000
Employment
Average
3 19 98 5 1,052 7
Employment
% of Total 39% 17% 13% 70% 30% 100%
Turnover
per 440,000 3,610,000 25,680,000 890,000 126,030,000 540,000
Business
% of Export
9% 13% 17% 12% 23% 17%
in Turnover
In all developed and developing economies, the number of SMEs has risen
significantly since the 1980s. Also, according to the report mentioned above,
SMEs dominate sectors of the economic activity that have to do with
manufacturing. Micro enterprises, dominate areas such as construction,
wholesale, retail and personal services. Larger companies on the other hand,
dominate energy production, extraction activities, transport and
communication services, and producer services.
7.2 SME Importance and Survival

SMEs are considered to be important for the national economy for a variety of
reasons. Mainly, SMEs offer the driving force for future larger businesses. In
the case that a small business will grow, it will employ more people, increase
the national income and distribute wealth. Also, SMEs are considered
important for the advancement of knowledge, development of innovation and
satisfaction of isolated market niches. It is estimated that SMEs are 2.4 times
more innovative than larger business (according to a study by the U.S.
Small Business Administration in 1995). Moreover, SMEs offer invaluable
experience to young people that enter the labour market after education.
Finally, smaller businesses can better accommodate the needs of special
employee groups. Finally, SMEs are the area from which entrepreneurial
activity is born. Sadly, SMEs have many problems. These problems often lead
to firm death, and it is usual that the number of firms closing down each year

is almost the same as the ones being established. Both business birth and
death rates are very high in the SME sector, especially among the micro and
small ones. However, some businesses manage to survive and these
ultimately are expected to make the difference.
SMEs have a variety of strengths that include:

Financial performance
Compared to larger businesses, owners of SMEs experience a higher
return on their investment. This is also the reason why some industries
are better suited for small rather than large businesses.
Innovation
SMEs are more flexible and can capture innovation much faster than
larger businesses. If the resources are there, they can market products
and services very fast.
Dependence of Larger Businesses on SMEs
In the market, most large businesses depend on SMEs for the delivery
of resources, services and other input for their production process.
Employment
As mentioned beforehand, SMEs can increase employment rates. They
have simple employment policies and can usually find the necessary
skills needed for them to respond to the market, with cost being the
only restriction.
On the other hand, SMEs face several weaknesses, the most important ones
being high failure rates and lack of managerial expertise. Also, globalisation
and information technology can either pose as a threat or an opportunity for
an SME, depending on its flexibility and vision. Moreover, traditional SMEs
might face a variety of problems that are results of the key differences
between large and small businesses. These are:
The owner, i.e. one person, has the biggest influence on the business
and so the business is dependent.
Small businesses cannot affect their environment, but can be affected
by it.
Usually, small businesses are single market players and offer their

products or services to a restricted part of the overall market.

Small businesses rely in most instances on a small number of
customers. Especially in the business to business sector, small
business might even have a sole client.
Small businesses will have difficulty raising capital and thus they
experience problems in expansion and strategy formation.
7.3 The Difference between Entrepreneurship and SME Management

Entrepreneurship and SME management can in many cases coincide,
though it is not the same thing. An educated individual within the enterprise
culture should be in a position to distinguish between entrepreneurs and small
business managers. In order to avoid a misunderstanding at this point, it
needs to be stressed out that both entrepreneurial and small businesses are
very important for the society and the economy. They are almost equally
important, since both supply the economy with income and increase its
cumulative wealth. They also both offer employment to people by increasing
their production and help alleviate social problems, such as unemployment.
However, they are very different in terms of their existence, since they pursue
and create new opportunities in a different way. So, although the benefits to
the economy are grossly similar, entrepreneurial and small businesses serve
different economic functions.
The main differences of entrepreneurial compared to small businesses are in

the ways they pursue and create new opportunities, and they fulfil the
personal ambitions of their owners. Differences can be identified both on a
personal level, entrepreneur vs. SME manager, and on a business level,
entrepreneurial vs. small business. The first differentiation is rather subjective
and case sensitive. Each business may require different personalities and
each entrepreneurial attempt, too. So, we would rely on the personal traits
theory for understanding that. However, it is much more straightforward to
distinguish entrepreneurial from small businesses. This distinction would
definitely also imply some things for the personality of the founder/owner. In
order to understand the distinction, we need to look at three different elements

of business:
1. Innovation
Unlike the small business, the successful entrepreneurial venture is
constructed upon a significant innovation. The opportunity lies more in
the area of an unexploited concept, while in the case of SMEs the
opportunity might be replication or slight differentiation of an existing
concept. Also, a small business might be introducing an innovation to a
part of the market that had no access to it. However, it is still not
considered to innovate, it is rather perceived as distributing innovation.
2. Growth
We cannot use size of business to determine whether it is
entrepreneurial or small; especially when the definition of an SME is in
a constant debate among researchers and policy makers. However,
there is a more intrinsic approach in terms of growth potential.
Entrepreneurial businesses have in fact a much higher growth potential
than small businesses, due to the level of innovation applied and the
value of the opportunity pursued. This can also imply that
entrepreneurial ventures might be slightly riskier than small businesses.
An entrepreneurial business might even be the start of a new industry
and a multinational company. On the other hand, small businesses
usually face market restrictions.
3. Strategy
All managerial acts require objectives and goals. These objectives and
goals characterise a businesss strategic outlook. Small businesses
usually form an informal strategy in terms of objectives that refer to
sales targets and cost reduction. Entrepreneurial businesses on the
other hand, will go far beyond the near future and formulate a strategy
similar to a larger business. In the entrepreneurial strategy, growth
targets, market development and share perspectives will be present, as
well as the key turning points in the businesses future.

Figure: The Difference between Small Businesses and Entrepreneurial

Ventures
Both entrepreneurship and SME management can create significant wealth

for the founder(s). Also, entrepreneurial ventures can be considered to be a
subset of the SME set of businesses. Finally, both types of activities belong in
the category of self employment and have a much higher risk than paid
employment.
Finally, in order to briefly return to the differences of the person, the

entrepreneur and the small business owner/manager, it is valid to say that
entrepreneurship is a different way to manage a business. The
entrepreneurial venture requires visionary management, in order to
encompass innovation, growth and strategy. A small business manager might
be very effective day to day manager, but may lack the ability to position his or
her business in the future within a complex and dynamic environment. So, one
could identify as ingredients of entrepreneurial management a focus on
change, a focus on opportunity, and the ability to manage the business
organisation-wide. These differences between entrepreneurs and
administrators are summarised by Stevenson (1999), whose analysis is based

on six key dimensions:

1. Strategic Orientation:
Entrepreneur: I will search for opportunity, and my
fundamental task is to acquire the resources to pursue
opportunity.
Administrator: I will prune my opportunity tree based on
the resources I control. I will not try to leap far beyond my
current situation.
2. Commitment to Opportunity:
Entrepreneur: Revolution Risk calculation.
Administrator: Evolution Risk aversion.
3. Commitment of Resources:
Entrepreneur: Do a little more with a little less.
Administrator: Large-scale commitment to resources.
4. Control of Resources:
Entrepreneur: Using but not owning resources.
Administrator: Acquisition and security of resources.
5. Management Structure:
Entrepreneur: Self-centred with informal relationships.
Administrator: Formal and structured organization.
6. Reward Philosophy:
Entrepreneur: Based on creation and harvesting of value.
Administrator: Protection of own position and security.

Discussion Points:
How important are SMEs in your country?
Why do most SMEs fail? Is it an acceptable fact or can this be
changed?
Can you identify an entrepreneurial business and an SME? Can you
identify their key differences?
How do you understand the concept of growth potential?
How do you evaluate yourself? As an Entrepreneur or an
Administrator? Why?
Which is more important: entrepreneurial behaviour or
administrative competence?

8. Future Challenges for Entrepreneurship Research
Be aware of the future in entrepreneurship research.
In this initial part of the course material, we have looked into the theory of
entrepreneurship as it has developed over the years. We identified a variety of
theoretical approaches and discussed the interdisciplinary nature of such a
crucial field. Also, we looked into several other aspect of entrepreneurship that
have emerged over the years and have attracted the interest of researchers.
The only issues that were not dealt with in this part have to do with economic
growth through entrepreneurship and the application of entrepreneurship
within various types of economic systems. These are included in the next
Part.
As the field of entrepreneurship evolves, research is dynamic and evolves

along. Entrepreneurship research is an applied scientific process that aims at
understanding and explaining. Busenitz et al (2003) reviewed all significant
academic output in the field and identified the future challenges of
entrepreneurship research. They claim that the boundaries of the field have
been set and therefore the time has come for researchers to start combining
theories and approaches and attempt to establish an inter-disciplinary
research profile. The key elements of such a profile would include research
topics that are at the intersections of the following items that have been
heavily researched:
The business environment
Individuals and teams
Opportunities
Mode of organising
Also, other topics could be combined with the above, such as:
Decision-making theories

Start-up factors of production

Information processing
Network theory
Education and training
Many similar propositions have been made. Therefore, it is clear to see that
entrepreneurship as a field has reached maturity and requires at this point
more challenging research questions in order to move forward.
The reader might find it interesting to follow the articles and material published
in a variety of academic journals and other resources. The key journals on
entrepreneurship that are being reviewed by prominent academics are:
Journal of Business Venturing.
The Journal of Small Business Management.
Small Business Economics.
Entrepreneurship Research and Development.
Entrepreneurship: Theory and Practice.
International Small Business Journal.
Family Business Review.
Creativity and Innovation Management.
Also, other significant academic journals that often publish articles on

entrepreneurship are:
Academy of Management Journal.
Academy of Management Review.
Journal of Management Education.
Strategic Management Journal.
Moreover, one can find numerous theoretical and applied resources on the
Internet. For example, Google offers 23,400,000 results for the word
entrepreneurship only. However, one be very careful about the quality of the
information available through the Internet. In general, it is advisable not to use
material accessed through sites that do not belong to prominent and well

known institutions, organisations and universities.
Finally, there are many books on entrepreneurship, both academic and

practical. Any book will offer insight on the field and widen the horizons of the
reader. However, the reader should carefully select where and how to spend
his or her budget.
Discussion Points:
Formulate one research question in the area of entrepreneurship
and describe why this is of importance. How would you research it?

Part A Bibliography and Further Reading
Amit, R., Glostein, L. and Muller, E. (1993) Challenges to theory development

in entrepreneurial research, Journal of Mathematical Sociology, 30, pp.
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Appelbaum, E. and Katz, E. (1986) Measures of risk aversion and
comparative statistics of industry equilibrium, American Economic Review,
76, pp. 524-29
Arabsheibani, G., de Meza, D., Maloney, J. and Pearson, B. (2000) And a
vision appeared unto them of a great profit: evidence of self-deception
among the self-employed, Economic Letters, 67, pp. 35-41
Aronson, R.L. (1991) Self Employment: A Labour Market Perspective, Ithaca,
New York, NY, ILR Press
Bernardo, A.E. and Welch, I. (2001) On the evolution of over confidence and
entrepreneurs, Journal of Economics and Management Strategy, 10, pp.
301-30
Blanchflower, D.G., Oswald, A. and Stitzer, A. (2001) Latent entrepreneurship
across nations, European Economic Review, 45, pp. 680-91
Bolton, J.E. (1971) Report of the Committee of Inquiry on Small Firms,
Cmnd.4811, London, HMSO
Boyd, D.P. (1984) Type A behaviour, financial performance and organisational
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Bruyat, C.A. and Julien P.A. (2001) Defining the field of research in
entrepreneurship, Journal of Business Venturing, 16, pp. 165-80
Burns, P. and Dewhurst, J. eds (1996) Small Business and Entrepreneurship,
2nd ed., NY, Palgrave
Leonard-Barton, D. (1984) Interpersonal communication patterns among
Swedish and Boston area entrepreneurs, Research Policy, 13, pp. 101-14
Busenitz, L.W., West, G.P., Shepherd, D., Nelson, T., Chandler, G.N. and
Zacharakis, A. (2003) Entrepreneurship research in emergence: Past
trends and future directions, Journal of Management, 29, pp. 285-308
Cantillon, R. (1755) Essai Sur la Nature du Commerce en Gnral, 1931 edn.
Ed. and tran. By H. Higgs, London, Macmillan
Carter, S. and Jones-Evans, D. eds (2000) Enterprise and Small Business,
London, Prentice Hall
Casson, M. (1982) The Entrepreneur: An Economic Theory, Oxford,
Robertson
Cooper, A.C., Woo, C.Y. and Dunkelberg, W.C. (1988) Entrepreneurs
perceived chances for success, Journal of Business Venturing, 3, pp. 97-
108
de Meza, D. and Southey, C. (1996) The borrowers course: optimism, finance
and entrepreneurship, Economic Journal, 106, pp. 375-86

Deakins, D. (1999) Entrepreneurship and Small Firms, 2nd ed., Berkshire,

McGraw-Hill
Dixit, A. and Rob, R. (1994) Switching costs and sectoral adjustments in
general equilibrium with uninsured risk, Journal of Economic Theory, 62,
pp. 48-69
Dunn, T. and Holtz-Eakin, D. (2000) Financial capital, human capital and the
transition to self-employment: evidence from intergenerational links,
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Official Publications of the European Communities
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http://ec.europa.eu/public_opinion/flash/fl160_en.pdf (May 20, 2007)
Goffee, R. and Scase, R. (1987) Patterns of business proprietorship among
women in Britain, in Goffee, R. and Scase, R., eds, Entrepreneurship in
Europe, London, Croom Helm
Hebert, R.F. and Link, A.N. (1988) The Entrepreneur Mainstream Views and
Radical Critiques, 2nd ed., New York, NY, Praeger
Kanbur, S.M. (1979) Of risk taking and the personal distribution of income,
Journal of Political Economy, 87, pp. 769-97
Kaufmann, P.J. and Dant, R.P. (1998) Franchising and the domain of
entrepreneurship research, Journal of Business Venturing, 14, pp. 5-16
Kets de Vries, M.F.R. (1977) The entrepreneurial personality: a person at the
crossroads, Journal of Mathematical Sociology, 14, pp.34-57
Kirzner, I. (1973) Competition and Entrepreneurship, Chicago, University of
Chicago Press
Kirzner, I. (1985) Discovery and the Capitalist Process, Chicago, University of
Chicago Press.
Knight, F.H. (1921) Risk, Uncertainty and Profit, New York, Houghton-Mifflin
Landau, R. (1982) The innovative milieu, in Lundstedt, S.B. and Colglazier,
E.W. Jr , eds, Managing Innovation: The Social Dimensions of Creativity,
Invention and Technology, New York, NY, Pergamon Press
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Economics, 9, pp. 508-23
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Boston University, Mimeo
McClelland, D.C. (1961) The Achieving Society, Princeton, Van Nostrand
McGrath, R.G. and MacMillan, I. (2000) The Entrepreneurial Mindset, Boston,
MA, Harvard Business Review
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Mitchell, J. C., eds, Network Analysis: Studies in Human Interaction,
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conflict and well being: a comparative study, Journal of Occupational

Behaviour, 22, pp. 551-68

Parker, S.C. (1997) The effects of risk on self-employment, Small Business
Economics, 9, pp. 515-22
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Heinemann
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Entrepreneurship courses in Tbilisi State University Part A

University of Piraeus May 2007 0

University of Piraeus May 2007 1

1.4.3 Government Policy .....................................................................29

University of Piraeus May 2007 2

The above arguments are clearly sufficient to justify the introduction of

With the generous support of the Government of Greece (Ministry of Foreign

The manual in hand constitutes part of the educational material to be

Professor Joseph Hassid

University of Piraeus May 2007 3

In this initial Part A of the Introduction to Entrepreneurship, we will go through

However, before we go into the theories and issues regarding

University of Piraeus May 2007 4

The focus on entrepreneurship is attributed to the importance of Small and

University of Piraeus May 2007 5

1.1.1 Arbitrage and uncertainty

University of Piraeus May 2007 6

Kirzner (1973, 1985) developed Cantillons thoughts looking into the

Knight (1921) focused on Cantillons entrepreneur in respect to uncertainty.

University of Piraeus May 2007 7

1.1.2 Co-ordination of the production factors

University of Piraeus May 2007 8

depicts the entrepreneurial activity. A wave of innovation hits the market,

1.1.4 Skill Differentiation

University of Piraeus May 2007 9

1.1.5 Career Mobility

University of Piraeus May 2007 10

1.1.6 A Final View of Economic Theories

University of Piraeus May 2007 11

1.2.1 The need for achievement

University of Piraeus May 2007 12

Association of achievement with one's own competence and effort, not

So, according to McClelland, the most satisfying thing for the

1.2.2 Internal Locus of Control

University of Piraeus May 2007 13

1.2.3 Risk Taking Propensity

1.2.4 Tolerance of Ambiguity

1.2.5 Type A Behaviour

1.2.6 Criminal Propensity

University of Piraeus May 2007 14

1.2.7 Independence and Job Satisfaction

University of Piraeus May 2007 15

cultural tendency, rather than a personal trait (Arabsheibani et al., 2000). In

So, as mentioned previously, over-optimism as a personal or cultural trait can

University of Piraeus May 2007 16

1.2.9 Criticism of the Psychological Traits Approach

University of Piraeus May 2007 17

1.3 Personal, Family and Social Issues

In general, studies have demonstrated that there is a positive correlation

University of Piraeus May 2007 18

1.3.2 Health and Disability

Studies have not managed to demonstrate a specific correlation between ill

1.3.3 Age, Education and Experience

University of Piraeus May 2007 19

networks, entrepreneurial opportunities become identifiable and

The counterpart of experience, education, appears to have an ambiguous

University of Piraeus May 2007 20

relation with entrepreneurial activity, too. If one considers education as an

University of Piraeus May 2007 21

elements that incorporate the transfer of experiential learning, parental self

University of Piraeus May 2007 22

propensity of the unemployed is closely related to the one of entrepreneurship

Moreover, it is essential to differentiate between rural and urban areas, since