Relationships between Entrepreneurship and Economics

Oyvin Kyvik1

- 16.06.2009 -

The following is written as an introduction to the role as co-chair for the track on Entrepreneurship and
Economics at the ICSB World Congress, Seoul, Korea – 2009.

1. Entrepreneurship and Economics – An Economic Perspective

This is written based on the conviction that both entrepreneurship and economics are important
phenomena, both in theory and in practice. It is further deduced that less entrepreneurship has
as a consequence less innovation and fewer business start-ups with its consequences on
employment and economic growth. In this context, entrepreneurs are needed to organize,
manage and assume the risks of business or enterprise which represent processes which are
positive for society.

The perspectives on entrepreneurship as a phenomena in social, business and economics are

varied, and ranging from the processes individuals go through from becoming “motivated to
discover” an innovation and converting it into something of value to themselves and to society,
to the managed entrepreneurial processes in large firms and further to the macro-economic
impacts on economic growth through innovation. Entrepreneurship thus is personal and
individual, but with a local, regional and national impact. Also the taxonomy of the
consequence of entrepreneurial activities varies, from value created in a small business start-up
to the collective creation of economic value on the level of society, the latter with obvious
more complex measurement and even political consequences.

Traditionally, that is in classical economics, three means of production are usually discussed,
namely capital, labor and land – and to this many would add entrepreneurship and possible
competence or knowledge to coordinate and organize the value creation process. Neo-classical
economics and its positivistic and rational market assumptions, however, do not have space for
the entrepreneur beyond the role of allocation of existing resources. However, as we now
know, decision makers suffer from bounded rationality, markets do fluctuate and market
opportunities and “temporary monopolies” indeed do occur. And this is where the
entrepreneur enters in his role as an opportunist (Coase, 1937 – transaction costs) or
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E-mail address: oyvin.kyvik@esade.edu

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alternatively as an arbitrageur (Kirzner, 1997 – the Austrian School). In Kirzner´s perspective
entrepreneurs drive the market by being vigilant to new opportunities (for entrepreneurial
profits). The Austrian school assumes subjectivism and is similarly opposed to the positivist and
mathematical modeling of neo classical economics (methodological subjectivism: focus on
knowledge, beliefs, perceptions and expectations of individuals). Schumpeter (1942) sees the
entrepreneur as an innovator and as the motor force of growth, technological change and
economic development, partly through creative destruction (with a gradual changing focus on
the individual person, innovator and entrepreneur in direction of a wider social perspective in
course of his scholarship). Later, Penrose (1959), Barney (1991) and Wernerfelt (1984)
introduced a resource-based view with entrepreneurship and innovation in a more social
perspective including notions of networking and social interactions between actors.

Knight (1921) introduced the relationship between the entrepreneur, risk, uncertainty and
profit to shed light on the dynamics of entrepreneurship. In a similar manner as Schumpeter,
Knight finds it difficult to consider an entrepreneurial role within the strict assumptions of neo-
classical economics. In Knight´s perspective, only the entrepreneur´s ability to handle
uncertainty generates profit.

In their review of recent developments in the economics of entrepreneurship, Minniti and

Lévesque (2008) argue the emergence of a new heterodox mainstream and claiming a move
from Homo Economics to Homo Sapiens with a declining distance between economics and the
other social and management sciences. First and foremost in the new research era is the
acceptance of bounded rationality which thus opens up the field to notions from cognition and
cognitive psychology. With more emphasis on cognition and psychology, economics and
entrepreneurship research will likely take a more human and less positivistic approach to
management – this will make management sciences also more accessible and relevant for
practicing managers and make it easier to make comparisons between theory and practice.

2. Entrepreneurship and Economics - a Managerial Perspective

The fundamental idea of the concept of entrepreneurship in management is that the individual
or a group of individuals by their own motivation, knowledge and initiative manage to create
and grow organizations and thus create added value in the society. The motivation for an
entrepreneurial act or process maybe many faceted and complex, ranging from a strong desire
to create something useful or valuable, because it does not exist, or due to extreme need or
despair – the motivations vary and may even be beyond monetary motives and rather driven by
higher-level needs such as need for recognition or self-realization.

Societies´ level of entrepreneurial activity also vary, apparently influenced by factors ranging
from socio-cultural history and climate to political stability, social order and legal system. Thus

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the potential entrepreneur´s capability to perceive opportunities for innovation and motivation
will in general depend on personal characteristics in addition to (local, regional or national) her
or his cultural embeddedness.

The entrepreneurial act and processes once an entrepreneurial idea has been recognized,
depend on a more or less conscious cognitive process of testing and trying out ways of
implementing the idea and this trial and error process frequently takes place in a solitary
manner or some times in a small group of collaborators unifying their resources towards a
common objective. However, usually, there is one lead-entrepreneur who directs the process. It
is this creative activity or what Schumpeter calls “creative destruction” (destruction of the old
ways of doing and introducing more efficient new methods). This often takes place in the form
of technical or organizational innovations (“economic growth occurs whenever people take
resources and rearrange them in ways that are more valuable…”, Paul Romer, Stanford
University cited in the Economist, March 2009) and by several individual entrepreneurs more or
less simultaneously which on a collective level and over time leads to economic development
and eventually economic growth. The process implies the creation of new knowledge and leads
to increased learning, value creation and higher welfare on a macro level. As illustrated in
Figure 1, there are likely to exist causal relationships between the individual entrepreneur

ECONOMIC SOCIETY
(INSTITUTIONAL
DEVELOPMENT STRUCTURES)

Personal
motivations Cognition

Cultural INDIVIDUAL SOCIAL

embeddedness ENTREPRENEURS NETWORK

Bounded
Resources rationality

Figure 1: Entrepreneurship and economics

(motivation, culture and resources), the entrepreneurial process involving social interaction
(often through a network), degree of support through society´s institutional structures and
long-term effect on collective innovation, creativity and economic growth. Similarly, it is
reasonable to argue that there exists a spiral effect between economic development (increased
economic resources due to economic growth), increased welfare and resources leading to
continuation of the positive effects of entrepreneurship. An improved educational system as

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result of increased welfare should, ceteris paribus, positively influence the level of knowledge
available and the access to innovation and entrepreneurship through R&D.

References:

Barney, J.B. (1996) The Resource-based Theory of the Firm, Organization Science, 1996 Vol. 7, No. 5,
September-October 1996

Coase, R. (1937) The Nature of the Firm, Economica Vol. 4, No. 16, pp. 386-405

Kirzner, I. (1997) Entrepreneurial Discovery and the Competitive Market Process: An Australian
Approach, Journal of Economic Literature Vol. 35, pp. 60-85

Knight, F.H. (1921) Risk, Uncertainty and Profit, Houghton Mifflin, Boston

Minniti, M. and Lévesque, M. (2008) Recent developments in the economics of entrepreneurship, Journal
of Business Venturing 23, Editorial, pp. 603-612

Penrose, E.T. (1959) The Growth of the Firm, John Wiley, New York

Schumpeter, J. (1942) Capitalism, Socialism and Democracy, Harper, New York

Wernerfelt, B. (1984) A Resource-based View of the Firm, Strategic Management Journal, Vol. 5, pp.
171-180.