Theories of Entrepreneurship – 4 Important Theories:

Cultural Theories, Economic Theories, Psychological

Theories and Sociological Theories
Various writers have developed variety theories on entrepreneurship and
popularized the concept among the common people. The theories of
entrepreneurship that are propounded by many eminent theorists have
been grouped under four categories.
They are:
I. Cultural Theories:
1. Theory of Imitating – Hoselitz
2. Theory of Social Culture – Stokes
II. Economic Theories:
1. Theory of Functional Behaviour – Casson
2. Theory of Economic Incentives – Papanek and Harris
3. Theory of Adjustment of Price – Kirzner
4. Theory of X-Efficiency-Leibenstein
5. Theory of Innovations-Schumpeter
6. Theory of Harvard School
7. Theory of High Achievement – McClelland
8. Theory of Profit-Knight
9. Theory of Market Equilibrium-Hayek
III. Psychological Theories:
1. Theory of Psychology-Kunkal
2. Theory of Personal Resourcefulness
IV. Sociological Theories:
1. Theory of Entrepreneurial Supply – Cochran
2. Theory of Religious Belief – Weber
3. Theory of Social Change – Hagen

I. Cultural Theories:
Cultural theories pointed out that entrepreneurship is the product of the
culture. Entrepreneurial talents come from cultural values and cultural
systems embedded into the cultural environment.
This theory supports two other theories i.e.:
1. Hoselitz theory and
2. Stokes theory.
1. Theory of Imitating:
According to Bert F. Hoselitz’s theory, supply of entrepreneurship is
governed by cultural factors and culturally minority groups are the
spark-plugs of entrepreneurial and economic development. In many
countries, entrepreneurs have emerged from a particular socio-economic
class. Hoselitz reveals that in several countries entrepreneurial talents
are found in persons having particular socio-economic background.
He emphasized the role of culturally marginally groups like Jews and the
Greeks in medieval Europe, the Chinese in South Africa and Indians in
East Africa in promoting economic developments. Further he has
emphasized on the theory through examples of Christians contributes to
entrepreneurship in Lebanon, Halai Memon industrialists in Pakistan and
Marwaris in India.
2. Theory of Social Culture:
According to David Stoke’s theory, entrepreneurship is likely to emerge
under specific social sanctions, social culture and economic action.
According to Stokes, personal and societal opportunities and the
presence of requisite psychological distributions may be seen as
conditions for an individual movement to get changed into industrial
entrepreneurship.

II. Economic Theories:

According to these theories, entrepreneurship and economic growth take
place when the economic conditions are favourable. Economic
development takes place when a country’s real rational income increases
overall period of time wherein the role of entrepreneurs is an integral
part.
Economic incentives are the main motivators for entrepreneurial
activities. Economic incentives include taxation policy, industrial policy,
sources of finance and raw materials, infrastructure availability,
investment and marketing opportunities, access to information about
market conditions, technology etc.
1. Theory of Functional Behaviour:
According to Mark Christopher Casson theories, entrepreneurship can
provide a synthetic theory of the business firm that provides an
integrated framework for many partial theories of the firm. His theory
deals with the functional behavior of entrepreneur and his qualities
which are crucial for his success.
Drawing on an institutional approach to entrepreneurship, it is argued
that economic insights can combine with managerial perspectives to
clarify and synthesize many strategic issues of firms. Four dimensions of
environmental shock lead to different forms of entrepreneurship that
leads, in turn, to different sizes and structures for firms.
Entrepreneurs create firms that identify and monitor sources of volatility
and channel information to key decision makers in the firm;
entrepreneurial firms are located at nodes of information networks. The
standard rational action model of neoclassical economics is generalized
to an uncertain world of volatility and differential access to information,
which generates differing perceptions of the business environment.
2. Theory of Economic Incentives:
According to G.F.Papanek and J.R.Harris Theory, economic incentives
are the integral factors that have induced entrepreneurial initiatives.
Main features of this theory are- (i) Economic incentives, (ii) Link
between economic gains and the inner urge and (iii) Economic gain.
3. Theory of Adjustment of Price:
According to M. Kirzner, the chief role of entrepreneur is based upon the
adjustment of price in the market. The buyer may pay higher price or
seller may accept a lower price, which gives rise to opportunities for
profit. Further if different prices prevail in the same market, there in an
opportunity for profitable arbitrage between two segments.
4. Theory of X-Efficiency:
Harvey Leibenstein propounded the theory of X-efficiency which is
popularly called Gap Filling Theory. According to Leibenstein,
entrepreneurial functions are determined by the X-efficiency which
means the degree of inefficiency on the use of resources within the firm.
It includes routine entrepreneur, new entrepreneurship, and twin roles
of entrepreneur, gap filling, input completing and X-efficiency factor. An
example of Leibenstein’s Thoery is Lalu Prasad Yadav, who is an
entrepreneur for Indian Railways. He had turned around the Indian
Railways by improving efficiency and innovation.
5. Theory of Innovation:
This theory is developed by Joseph Schumpeter, who believes that
entrepreneur helps the process of development in an economy.
Schumpeter’s theory of entrepreneurship is a pioneering work of
economic development. Development in his sense implies that carrying
out of new combinations of entrepreneurship is basically a creative
activity. According to Schumpeter an entrepreneur is one who perceives
the opportunities to innovate, i.e., to carry out new combinations of
enterprises. He says that an entrepreneur is one who is innovative,
creative and has a foresight.
According to him, innovation occurs when the entrepreneur:
i. Introduces a new product
ii. Introduces a new methods of production
iii. Opens new market
iv. Conquests of new source of supply of raw material
v. Carrying out new organization.
The theory emphasizes on innovation, ignoring the risk taking and
organizing abilities of an entrepreneur. Schumpeter’s entrepreneur is a
large scale businessman, who is rarely found in developing countries,
where entrepreneurs are small scale businessmen who need to imitate
rather than innovate.
In view of the above, Schumpeterian theory of entrepreneurship
has got the following features:
(i) Distinction between invention and innovation – Schumpeter makes a
distinction between innovation and invention. Invention means creation
of new things and innovation means application of new things onto
practical use.
(ii) Emphasis on entrepreneurial function – Schumpeter has given
emphasis on the role or entrepreneurial functions in economic
development. In his views development means basic transformation of
the economy that is brought about by entrepreneurial functions.
(iii) Presentation of disequilibrium situation through entrepreneurial
activity – The entrepreneurial activity represents a disequilibrium
situation, a dynamic phenomenon and a break from the routine or a
circular flow towards equilibrium.
Critical Evaluation:
Schumpeter’s theory of innovation is criticized on the following
ground:
i. The theory has the scope of entrepreneurism in the sense that it has
included the individual businessman along with the directors and
managers of the company.
ii. Schumpeter’s innovating entrepreneurs represents the enterprise with
the R&D and innovative character. But developing countries lack these
characters.
iii. The theory emphasizes on innovation and excludes the risk taking and
organizing aspects.
iv. Schumpeter’s entrepreneurs are large scale businessman who
introduces new technology, method of production.
v. Schumpeter remained silent about as to why some economists had
more entrepreneurial talent than others.
However, despite the above criticisms, this theory is regarded as one of
the best theories in the history of entrepreneurial development.
6. Theory of Harvard School:
Harvard school contemplated that entrepreneurship involves any
deliberate activity that initiates, maintains and grows a profit-oriented
enterprise for production or distribution of economic goods or services,
which is inconsistent with internal and external forces. Internal forces
refer to the internal qualities of the individual such as intelligence, skill,
knowledge experience, intuition, exposure, etc.
These forces influence the entrepreneurial activities of an individual to a
great extent. On the other hand external forces refer to the economic,
political, social, cultural and legal factors which influence origin and
growth of entrepreneurship in an economy.
This theory emphasizes on two types of entrepreneurial activities i.e.- (i)
Entrepreneurial functions like organization and combination of resources
for creating viable enterprises, and (ii) The responsiveness to the
environmental condition that influences decision making function
besides the above mentioned activities.
Harvard School also emphasizes on following points:
i. To search and evaluate economic opportunities,
ii. To master the process of mobilizing resources to accomplish the goal,
iii. To interconnect the different market segments for creating an
absolutely ideal marketing environment,
iv. To create or expand the firm or business enterprise,
7. Theory of High Achievement:
This theory is developed by David McClelland.
According to him entrepreneurship has been identified with two
characteristics such as:
(i) Doing things in a new and better way, and
(ii) Decision making under uncertainty.
He stressed that people with high achievement oriented (need to
succeed) were more likely to become entrepreneurs. Such people are not
influenced by money or external incentives. They consider profit to be a
measure of success and competence.
According to McClelland, a person has three types of needs at any
given time, which are:
(i) Need for achievement (get success with one’s one efforts)
(ii) Need for power (to dominate, influence others)
(iii) Need for affiliation (maintain friendly relations with others)
8. Theory of Profit:
This theory is developed by Knight, Frank H. He points out that
entrepreneurs are specialized group of persons who bears risk and deals
with uncertainty. Main features of this theory are pure profit, situation of
uncertainty, risk bearing capability, guarantee of specified sum,
identification of socio economic and psychological factors, use of
consolidation techniques to reduce business risks.
9. Theory of Market Equilibrium:
According to Hayek, the absence of entrepreneurs in Neo-classical
economics is intimately associated with the assumption of market
equilibrium. The elasticity of bank credit causes a disparity between the
natural and market rate of interest. According to this theory, the
postulate presupposes the fact that there is no need for further
information to modify the decision.

III. Psychological Theories:

Entrepreneurship gets a boost when society has sufficient supply of
individuals with necessary psychological characteristics. The
psychological characteristics include need for high achievement, a vision
or foresight and ability to face opposition. These characteristics are
formed during the individual’s upbringing which stress on standards of
excellence, self-reliance and low father dominance.
1. Theory of Psychology:
This theory is developed by John H. Kunkel. According to him
psychological and sociological variables are the main determinants for
the emergence of entrepreneurs. According to him, entrepreneurship
can be dependent upon the following structures in the economy, i.e.- (i)
Demand Structure (ii) Limitation Structure (iii) Labor Structure and (iv)
Opportunity structure.
Beginning with the premise that fundamental problems of economic
development are non-economic, he emphasizes on the cultural values,
role expectation and social sanctions as the key elements that determine
the supply of entrepreneurs. As a society’s model personality,
entrepreneur is neither a supernormal individual nor a deviant person
but is a role model of the society representing model personality.
Model personality as a derivative of social conditioning, the role is partly
shaped by the model personality that is a derivative of social
conditioning of his generation. Further, innovation and invention go
together with the type of conditioning in the society.
Role expectations and entrepreneurial role: Primary cultural factor
operating on the personality of the executive and the defining of his role
by those involved must accommodate to some degree to the necessities
of the operation to be carried out.
2. Theory of Personal Resourcefulness:
According to this theory, the root of entrepreneurial process can be
traced to the initiative taken by some individuals to go beyond the
existing way of life. The emphasis is on initiative rather than reaction,
although events in the environment may have provided the trigger for
the person to express initiative. This aspect seems to have been
subsumed within ‘innovation’ which has been studied more as the
‘change’ or ‘newness’ associated with the term rather ‘pro-activeness’.
IV. Sociological Theory:
Entrepreneurship is likely to get a boost in a particular social culture.
Society’s values, religious beliefs, customs, taboos etc., influence the
behaviour of individual’s in a society. The entrepreneur is a role
performer according to the role expectations by the society.
1. Theory of Entrepreneurial Supply:
Thomas Cochran emphasizes on the cultural values, role expectation and
social sanctions as the key elements that determine the supply of
entrepreneurs.
2. Theory of Religious Belief:
Max Weber has propounded the theory of religious belief. According to
him, entrepreneurism is a function of religious beliefs and impact of
religion shapes the entrepreneurial culture. He emphasized that
entrepreneurial energies are exogenous supplied by means of religious
beliefs.
The important elements of Weber’s theory are described further:
i. Spirit of capitalism – In the Webbrian theory, spirit of capitalism is
highlighted. We all know that capitalism is an economic system in which
economic freedom and private enterprise are glorified, so also the
entrepreneurial culture.
ii. Adventurous spirit – Webber also made a distinction between spirit of
capitalism and adventurous spirit. According to him, the former is
influenced by the strict discipline whereas the latter is affected by free
force of impulse. Entrepreneurship culture is influenced by both these
factors.
iii. Protestant ethic – According to Max Webber the spirit of capitalism
can be grown only when the mental attitude in the society is favourable
to capitalism
iv. Inducement of profit – Webber introduced the new businessman into
the picture of tranquil routine. The spirit of capitalism intertwined with
the motive of profit resulting in creation of greater number of business
enterprises.
3. Theory of Social Change:
This theory is developed by Everett E. Hagen. It explains how a
traditional society becomes one in which continuing technical progress
takes place. It exhorts certain elements which presume the
entrepreneur’s creativity as the key element of social transformation and
economic growth. It reveals a general model of the society which
considers interrelationship among physical environment, social culture,
personality etc.
According to Hagen, most of the economic theories of underdevelopment
are inadequate. Hagen insisted that the follower’s syndrome on the part
of the entrepreneur is discouraged. This is because the technology is an
integral part of socio cultural-complex, and super-imposition of the same
into different socio-cultural set-up may not deliver the goods.
The Kakinada Experiment:
Conducted by McClelland in America, Mexico and Mumbai. Under this
experiment, young adults were selected and put through a three month
training programme. The training aimed at inducing the achievement
motivation.
The course contents were:
i. Trainees were asked to control their thinking and talk to themselves,
positively.
ii. They imagined themselves in need of challenges and success for which
they had to set planned and achievable goals.
iii. They strived to get concrete and frequent feedback
iv. They tried to imitate their role models those who performed well.
Conclusions of the Experiment:
(i) Traditional beliefs do not inhibit an entrepreneur
(ii) Suitable training can provide necessary motivation to an
entrepreneur.
(iii) The achievement motivation had a positive impact on the
performance of the participants.
It was the Kakinada experiment that made people realize the importance
of EDP, (Entrepreneurial Development Programme), to induce motivation
and competence in young, prospective entrepreneurs.