LECTURE ON : THEORIES OF ENTREPRENEUESHIP

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Outline
 What’s a theory?

 What are importance of theories of entrepreneurship?

 The theories of entrepreneurship

What’s a theory?
 Set of assumption, proposition/ accepted facts that attempts to
provide a reasonable or rational explanation of cause and effect
relationships among group observed phenomenon.(b/s
dictionary)

 Its supposition or system of idea intended to explain something

especially based on general principles independent of things to
be explained.(oxford dictionary)

 It’s a set of interrelated concepts, definitions and propositions

that explains or predicts events or situations by specifying
relations among variables.
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Importance of entrepreneurship
theory
 Helps to explain the concept of entrepreneurship i.e defines
entrepreneurship and it’s origin and also benefits and failures.

 Help to set important boundaries and differentiate

entrepreneurship

 Helps to develop history of entrepreneurship that provide

reference for entrepreneurs e.g innovation theory and theory of
high achievement offer characteristics of an entrepreneur

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Cont..

 Helps to explain context regarding business opportunities e.g

sociological theory offers social context: entrepreneurs must
have people with a vision and need for high achievement around
them for their ventures to be successful.

 In summary entrepreneurship theories guide people on key

elements that influence the success of the business and what
entrepreneurship entails.

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1. Economic theories of
entrepreneurship (Richard
Cantillon)
 This theory asserts that the economy and entrepreneurship are
closely linked together.
 Good economy =good entrepreneurship environment
 Motivation from economic incentives i.e industrial policy, policies
of taxation, financial and resource sources, availability of
infrastructure, investment opportunities, marketing opportunities,
availability of information regarding the conditions of the market
and technology among others.
 An entrepreneur is a risk taker; the future is unpredictable

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2. Sociological theories of
entrepreneurship (Paul D. Reynolds)
- Rationale:the success of an entrepreneur is affected by their
social culture.
- They are more likely to achieve growth in particular social
settings.
- The social aspects; social values, customs, taboos, religious
beliefs and other cultural activities.
- He or she has to conform to the social expectations when
carrying out their business.

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3. Entrepreneurship Innovation
theory (Joseph Schumpeter)

- An entrepreneur grows by being innovative, creative and

having a foresight.

- Innovation results in;

 Introduction of a new product / service
 Introduction of a new production method
 Opening of a new market
 Introduction of new organization in any industry
4. Psychological theory
Entrepreneurship gets a boost when society has sufficient
supply of necessary psychological characteristics such as;

• need for high achievement

• A vision or foresight
• Ability to face opposition
- A person can only possess these traits during their;
 upbringing,
 when they are self-reliant and when there is low father
dominance.
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5. Resource based theory
• According to this theory, entrepreneurs require resources to go
about their business. Their efforts must be combined with
resources such as ;
• Time
• Labor
• Money (Capital) for growth of their business.
• Access to information, education and leadership
*Failure to access resources can cause their efforts to become
fruitless.

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6. Theory of high achievement/theory of
achievement motivation(David McClelland)
• People who aim to become entrepreneurs must have a need for
achievement, a need for affiliation and a need for power.

• These needs act as a basis upon which entrepreneurial

personality is established.

• Achievement motivation is significant in entrepreneurship

because it is the one that leads to economic and social
development
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Cont.
• The need for achievement gives entrepreneurs the drive to excel,
advance and grow. They always want to achieve success in their
endeavors.

• The need for power gives entrepreneurs a drive to dominate in a

certain field and thus cause influence among other people.

• The need for affiliation is the drive for friendly and close inter-
personal relationship.

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7. Status withdrawal theory by (E .hagens)

 According to Hagen the genesis of entrepreneurship is from the

point of withdrawal of status respect of a group.

 That is the social group or a class which lost its previous prestige or
minority group tends to engulf itself into aggressive entrepreneurial.

 In such situation, the status loosing group and its members

endeavors to regain their status by undertaking rigorous
entrepreneurial drive.

 Hagen's actually bases his theory on the general model of a society

and views an entrepreneur as a trouble shooter who contributes to
the development of the economy. 13
Cont.’…

 According to this theory ,it is the creativity of the entrepreneur

that brings about social transformation and economic
development.

 Economic growth is associated with the social and political

changes.

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 Four events that leads to status
withdrawal
i. Displacement of a traditional elite group by physical force.

ii. Unfair criticism of values, symbols due to change in attitude of

superior class.

iii. Inconsistency of statistical symbol due to change in economic

power.

iv. Non acceptance of expected status on migration to anew

society.

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Personality of an entrepreneur
 Retreatist-An individual who works in the society but is
indifferent to the work and position.
 Ritualist- an individual who works in a manner accepted and
approved by the society but has no hopes of improving on his/
her position.

 The reformist-An individual who fights against the injustice and

tries to rebel against the established society in order to form
anew society.

 The innovator-An individual who endeavors to bring about new

change and utilizes all opportunities. 16
Theory criticism
 The theory lacks general application as it is always not true that
prall the social group have behaved in the same manner
advocated in the theory.

 The theory ignores other various factors accountable for the

development of entreneurship.

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8. Opportunity based theory (Peter Drucker)

 According to this theory ,entrepreneurs excel at seeing and

taking advantage of the possibilities created by social,
technological and cultural changes.

 E.g where a business that caters for the senior citizen might view
a sudden influx of younger residents to neighborhood as a death
stroke, an entrepreneur might see it as a chance to open anew
club.

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CONT’

- This theory believes that an entrepreneur do not create

change but they exploit opportunities that change( in
technology, consumer preference, etc.) creates.

- The entrepreneur always searches for change, responds to

it and exploits it as an opportunity.

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Cont’
 For Drucker, an entrepreneur has an eye more for possibilities
created by change than problems.
 Opportunity based theory is based on the following elements of
opportunity.
i. Opportunities are often tied to a specific purpose.
ii. Opportunities are endless.
iii. An opportunity opens up to another.
iv. Opportunities have companions.
v. Opportunity involves facing opposition.
vi. Opportunity involves taking risk.
vii. Exploitation of opportunity involves discipline
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Cont’

 Therefore to look for an opportunity as a matter of necessity is a

normal thing to do.

 This is because opportunity is to be expected always.

 It is this expectation that translates picture into reality which is

simply entrepreneurship.

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CONCLUSION

 Entrepreneurship is a multidisplinary area governed by human factors –ever

changing society pursuing economic objectives, social objectives and
psychological objectives.

 Theories of entrepreneurship are woven into socialogical, cultural, psychological,

political and managerial fiber.
 It forms an economic web.

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