Classical Economics - Entrepreneurship Theories and Venture Creation - Coursework Example

Entrepreneurship and Venture Creation Entrepreneurship s back to the 17th and 18th century. Currently, the term entrepreneur refers to an individual with leadership qualities, and one who is innovative in the industry. Several theorists and economists consider abilities such as team building, management and effective leadership as fundamental traits of an entrepreneur (Parker, 2011). Adam Smith and Richard Cantillon are believed to be the pioneers of entrepreneurship as a field of study since late 17th century and early 18th century. The study was considered a foundation to classical economics. Richard Cantillon (1680-1734) made attempts to study of entrepreneurship in depth. He viewed the entrepreneur as an individual risk taker, deliberately allocating various resources with the aim of exploiting the available opportunities for maximum financial returns. Cantillon also stresses the willingness of the entrepreneur to embrace risk and pursue an investment without certainty on the outcome. Say, (1767-1832) claims that an entrepreneur being a manager to the firm can be regarded as one of the inputs in the production process. Unlike Cantillon, Say overlooks the individual’s risk-taking roles and stresses that the main quality one should have in order to be considered an entrepreneur is good judgment. Another economist, Marshall, argues that being an entrepreneur requires one to be alert in the equilibrium world, which is static in nature and needs to take action after an assessment to determine the most favorable opportunities. Marshall (1964) added that for an individual to be considered an entrepreneur, he/she needs not only to be a risk-taker and have good management qualities, but also innovative. Innovation is regarded a key success factor in the running of a business. With innovation the business is able to cultivate new operation methods and also, new opportunities that can be instrumental in minimizing the operational costs and at the same time ensure maximum profits. A simple definition of entrepreneurship is the process of starting a business or any form of organization. The individual starting the business, referred to as the entrepreneur, who is the person in charge of the success or failure of the business. Researchers who define an entrepreneur considering all the activities and responsibilities associated with him/her argue that; an entrepreneur is that individual whose specialty is taking responsibility and making all the necessary judgmental decisions on issues regarding the form, location, or the use of goods, institutions or resources (Katz and Shepherd, 2004). Therefore, it is his/her duty to acquire all the requisite resources for the running of the business. Entrepreneurship can also emerge in already existing and fully operational firms/businesses. Activities such as corporate ventures are entrepreneurship activities within a firm and they are referred to as entrepreneurships. The entrepreneurs here are all the individuals in the organization willing to take some risk and exercise some initiative. They engage in activities such as organizing, supply of capital, employing resources, decision making and planning all aimed at the innovation of a new product or making improvements on the existing products. All activities aimed at the creation of some profits can all be categorized under entrepreneurship. Schumpeter (1982) derived the definition for entrepreneurship from his understanding of new opportunities. He viewed entrepreneurship as a management strategy that involves the pursuit of available opportunities without the consideration of the currently controlled resources. There are several theories associated with entrepreneurship. Cantillon’s theory views an entrepreneur as a risk taker who brings supply and demand to equilibrium in the economy (Parker, 2011). He overlooks arguments that the entrepreneur is a factor of production. The Marshall’s approach to entrepreneurship bases its arguments in the creation of equilibrium. With good knowledge of market conditions, the approach assumes the market to be a perfect competition comprised of homogenous goods and free market entry and exit. Marshall’s approach aims at showing how the markets behave under perfect competition. Marshall further argues that every player in the market will get returns according to their investments in the production process. Therefore, in the production process, there will be no exploitation in terms of labor or other resource contributions. According to Schumpeter (1942), Marshall’s approach used innovations by small competitors in the market and disconcertingly argues that for economic progress and innovation to take place, production in large scales is essential. The theory debated equilibrium by using a perfect competition market that guaranteed many players a share in the market. It is mostly concerned with the contributors who brought the demand and supply to equilibrium in the market. The approach uses large numbers of uncertain entrepreneurs who give little contributions but make a big impact on economic progress. Another theory in entrepreneurship is Social Enterprise (Parker, 2011). The social enterprise school views entrepreneurship as a ‘social enterprise’ initiative, which refers to an organization pursuing a double or a triple bottom line through the use of earned income approaches. The organization here is not limited by its nature; it can be either public or private. Subsidies from the public sector and contributions from charity are included in the revenue. The Social Enterprise Schools are non-profit making centers but they consist of organizations that generate solutions to social problems and other businesses that make profits. The profits are then donated to a social venture. The Schultz Approach has also been used to explain entrepreneurship. The theory states that entrepreneurship is the capacity to cope with disequilibrium situations. The present agents during disequilibrium situations can act sub-optimally and change their resources with the aim of achieving a high level of satisfaction. The approach now defines entrepreneurship as the ability to manage the reallocation efficiently considering the fact that the agents have different degrees in terms of entrepreneurial ability. The Schulz approach states that during disequilibrium, individuals are always aware of the existing opportunities to increase satisfaction but the process of reallocating resources requires time. According to Schultz (1975), the effective and efficient allocation of resources can be achieved through experimenting or through investments in human capital. Schultz argues that an entrepreneurship market exists and therefore it is possible to carry out an analysis on entrepreneurship with the demand and supply framework. The Kirzner’s ‘alert’ entrepreneur approach represented the Neo-Australian approach to entrepreneurship, which mainly focused on determining whether the market economy worked and the process that took the economy to equilibrium. Kirzner assumes the economy to be initially in disequilibrium state and all the competitions taking place amongst ‘alert’ entrepreneurs usually lead it back to equilibrium. Kirzner argues that markets do not always exist in a clear state and well-informed representative agents do not exist. According Kirzner, change is caused by incentives among the entrepreneurs. The different levels of information and knowledge among different agents in the market provide the incentives needed by the entrepreneurs. Kirzner maintains that disequilibrium can be caused by a slight improvement in the production technique or even a shift in preferences (Kaushik and Bhatnagr, 2009). He also argues that for entrepreneurs to be present in the market, the market must be at a disequilibrium state. When there is equilibrium, everybody in the market will be able to carry out his or her initial exchange plans. Disequilibrium creates opportunities for entrepreneurs to carry out their creativity and ensure all planned activities are accomplished. Therefore, job and profits opportunities in the market are made available to entrepreneurs through interference with the equilibrium systems caused by external forces. According to Kirzner, external shocks that constantly hit the economy are the main causes of disequilibrium. The economic agents present in the market sometimes completely ignore the available additional information. The ‘alert’ entrepreneur takes advantage of this opportunity and gets into the market and at the same time moves the economy to equilibrium, which a state that no more additional information can be learnt. Kirzner’s approach to entrepreneurship views disequilibrium as a state that can only be corrected back to equilibrium by entrepreneurs. The entrepreneurs’ main function is producing and exchanging goods and services. However the approach emphasizes mainly on the exchange of opportunities and progress coming out from this part. He states that the progress will only be achieved through the presence of several players in the market. Kirzner also considers entrepreneurship as an act of risk-taking. This is because of the low amounts of profits involved and in some cases there are negative returns or the returns break-even. There are uncertainties regarding profits in the entrepreneurial environment. Another theory in entrepreneurship is the discovery and opportunity theory by Schumpeter (1999). This is also referred to as the equilibrium destruction theory. Entrepreneurship here is well-thought-out to represent innovation. The theory is simply concerned with the services an entrepreneur can offer to the society and not the profits that come with the job. The Schumpeterian theory also argues that the entrepreneur can stir the economy from a motionless equilibrium position. Schumpeter did not deny arguments citing that accumulation as a process can help elevate an individual’s social power and social prestige. However, he contemplated that the very mainspring of the entrepreneurial function as an exercise is the powerful will to avow economic control. The entrepreneur is not (necessarily) the one who invents new combinations but the one who identifies how these new combinations can be applied in manufacturing process. Such reasoning suggests that the person running a business is considered an entrepreneur only if he is carrying out new combinations. The entrepreneur shifts the industrial structure from the fixed equilibrium in such a way that it develops innovative products or manufacturing procedures, in that way making the rest of the businesses obsolete. This is the process of "creative destruction" (creating uncertainty), which Schumpeter saw as the driving force behind economic development (Schumpeter, 1949). The other approach to entrepreneurship is the Knight’s approach. According to Knight, the main function of the entrepreneur is to assume the uncertainty related to these events, thereby shielding all other stakeholders against the entrepreneur. It could be argued that the innovating role of the entrepreneur was already identified or at least mentioned by Marshall (Storey, 2003). Knight also views an entrepreneur in terms of Risk, Uncertainty as well as Profit. Knight acknowledged the distinction between risk and uncertainty. The second one is uninsurable as it is concerned with unique events, for example, a shift in consumer taste. According to Knight, the main function of the entrepreneur is to assume the uncertainty related to these events, thereby shielding all other stakeholders against it (Storey, 2003). That is, the entrepreneur exercises judgment over these unique situations, the uncertainty in the economy, and functions as an insurance agent. Knight explicitly argues that entrepreneurs are owners of companies, that is, residual claimants, and thus receive profits. According to Braude (2013), in order to accrue profit, the entrepreneur carries out three tasks, which include adaption to changes in the economic environment, initiation of useful changes or innovations, and assumption of the consequences of uncertainty related to the company. Hence, it can be argued that Knight’s theory of entrepreneurship is a refinement of the theory by Cantillon. The latter also argued that entrepreneurship is closely connected to risk/uncertainty but did not recognize the important distinction between the two. However, the ‘Cantillonian’ entrepreneur is also an arbitrageur who ensures that the economy is in equilibrium-a function that is not entrusted. The Neoclassical Constraints argue that an economy cannot be static and therefore the state of static equilibrium is unrealistic. Large profits in the entrepreneurial situation are also not easy to come by. The wholesome application of the neoclassical theories is also unrealistic. According to another theory known as the Biological Theory of Entrepreneurship, several academic theories of gender differences offer explanations based on deeply seated cultural or even biological differences between men and women (Katz & Shepherd, 2004). The practitioner literatures are also particularly expected to highlight gender dissimilarities, interpreting them as essential parts of what it means to be a man or a woman in the entrepreneurial process. However, other especially role-based theories emphasize that gender differences in behavior should be expected to change along with other social changes. Moreover, even theories of more stable gender differences generally admit the co-existence of more malleable gender differences. Risk has long been a central concept in the entrepreneurship literature suggested by Adam Smith and J.S. Entrepreneurial activities are frequently assumed to involve risk-taking, especially relative to managerial activities within established corporations. However, research has failed to consistently find risk-taking propensity to be a trait distinguishing different entrepreneurs. A more promising recent line of research has suggested that entrepreneurs differ in cognitive style from others and that they may be more likely to make particular cognitive errors, especially errors of overconfidence (Harper 2002). Psychologists have recognized reasonable and steadfast levels of disparities between men and women in risk-taking actions. A research carried out consisting of 150 studies, examined such differences and the results had some evidence of a chronological trend towards smaller disparities. The results also concluded that men were drastically more likely to engage in 14 out of 16 types of risky activities than women. Their results showed that the males took more risks even when it was clear or almost clear that the outcome will not be favorable, and that females seemed to be disinclined to take risks even in fairly risky situations or when it was a good idea, leading to the speculation that “men and boys would tend to encounter failure or other negative consequences more often than women and girls” and that “women and girls would tend to experience success less often than they should” (Braude 2013) Psychologists’ views explain why women are risk-averse and are skeptical to venture into unfamiliar territories as regards business operations. Risk-taking is one the entrepreneurial competencies that can propel a business to growth and innovation that ultimately may make a business enterprise to be successful. Risk averseness may contribute immensely to business failure and collapse. This might explain why women enterprises fail within five years of their establishment/start-up. Researches carried out on business decision-making suggest that women prefer lower risks than men, especially in financial contexts. Their own experimental study of business students showed that women preferred less financial risk than men across a variety of framing scenarios. This view is consistent with a perspective that views financial leverage as risky, women are also less likely to apply for a loan and are more likely to use personal assets to finance the enterprise or as collateral. Several theorists have frequently commented that women entrepreneurs recognize or evaluate risk in a different perspective than men, suggesting that men are more likely to engage in risky business ventures than women (Katz & Shepherd, 2004). It has also been suggested that women consider activities such as raising external financing very risky and as a result, they may be less willing to undertake them. These kinds of activities may put them at risk of losing control over their business to outside stakeholders. Harper (2002) suggests that small elite groups of women entrepreneurs approach risk-taking in a manner similar to men, but that on average, women entrepreneurs are much less willing to undertake substantial business risks. She suggests that men build businesses of all sizes, but most women build only very small businesses, with a few building large firms: The fear of risks divides the two ends of the spectrum. According to Sociological Theories of Entrepreneurship, entrepreneurial activities emerge as social entities right from the beginning; solo ventures also tend to implicitly involve a certain choice that entails not sharing ownership with others during the founding process (Kaushik and Bhatnagar, 2009). How a venture begins and whether others are recruited to join the effort can have lasting consequences on its performance and survival. Enterprises can be formed as a result of teams. Three principles underlying team formation may be distinguished: choice on the basis of homophily, choice controlled by context or opportunity configuration and purposive choice (Keister, 2005). Homophily refers to the tendency of people to associate with others who resemble them, for instance selecting people with gender or ethnicity as the main focus. Choice made with a certain purpose shows the tendencies in people to choose from others who possess the same valuable skills as theirs, such as experience or education. Opportunity structures also establish a framework within which the first two principles work. The founders cannot choose or consider choosing an individual whom they have not met or have never made contact with, for example, a person working in another organization or living in a different city. Entrepreneurship has a psychological contract involving a-give-and-take transaction relationship in form of teamwork involving two or more individuals who jointly establish a business in which they have a financial interest (Katz & Shepherd, 2004). These individuals are present during the pre-start-up phase of the firm before it actually begins to supply its goods or services to the market. An individual must take part in the process from the start and also must have an equity stake in the venture to be considered a team member. A wide area of the text deals with the supposition that teams are a deliberate choice of a lead entrepreneur or set of founders (Keister, 2005). David (2003) postulate that there are psychological benefits derived from relationships between team members unlike a solo entrepreneur who must bear the burden of making decisions and facing their consequences with no one else to blame, entrepreneurial teams spread the responsibility across individuals. Entrepreneurial team members always have their equity at stake and this influences their confidence in each decision they make. Also, having to defend a decision from other team members helps the entrepreneur to be more confident and fully informed before tabling a proposal for discussion. The Biological perspective of entrepreneurship involves a psychological fulfillment and differences in behaviors, which is exhibited by difference in gender in their activities as entrepreneurs. The similarities between Kirzners and Schultz theories on one hand and Schumpeters on the other also appear substantial, especially with respect to the tasks performed by the entrepreneur. All three theories identify that the entrepreneur discovers business opportunities. Schumpeter defines the opportunities identified by entrepreneurs as innovations, which shift the economy from its static equilibrium position. Under Kirzners and Schultzs disequilibrium supposition, the opportunities occur when information is exposed. Individuals react to these opportunities by changing behavior and acting differently. This process can be compared to the Schumpeterian innovative process that also involves doing things differently. In the application of these theories to an economy like the UK economy, the economy can only borrow the concept of huge profits as an antecedent to entrepreneurial innovation and the startup of entrepreneurial venture. In such cases what commonly happens is that the huge profits achieved are ploughed back into the business as capital for expansion. The industry develops, turn out to be organizational, and abandons its original advantage as its rivals imitate its approaches. This is eventually perceived as a commonplace enterprise with very ordinary profits (Katz and Shepherd, 2004). Even so, of course, the generation and deployment of capital entailed in this process is very beneficial to the national economy concerned. Enterprises are delicate adventures and without the support of the government new enterprises cannot take off. Markets are unstable and unpredictable and the government should be perceived to be supportive of business rather one that stifles business. The UK economy finally moved out of recession, which it had moved into in the third quarter of 2008. The GDP had dropped by 2.6%, a figure by which the economy had improved in the whole year of 2007. The UK government should provide an enabling environment to entrepreneurs with a view to inculcating the entrepreneurial culture in Kenya. This can be done through review of the education curriculum, giving subsidies to the entrepreneurs, establishing pro-business policies and finally initiate mechanisms that are credit borrowing friendly in the women fund and the youth fund to make it more accessible to the intended users. Theories of entrepreneurship are mainly designed to determine how a market system works and the relationship between entrepreneurship and profits. The Marshallian theory which indicates the existence of perfect information and perfect competition assumptions fails to answer both questions accurately because the UK’s economy is not in a state of static equilibrium, it keeps on changing, hence a dynamic orientation. The Marshallian model indicates the non-existence of excess profits and does not distinguish entrepreneurship from routine production processes. The Schumpeterian analysis is the closest to the reality regarding the work of the U.K’s capitalistic market system and the creation of profit. He also gives great importance to individual innovations. People living in the UK being individualistic people, Schumpeter’s theory fits well into the country’s economic context. In conclusion, throughout the evolution of entrepreneurship theory, different scholars have posited different characteristics that they believe are common among most entrepreneurs. By combining the above disparate theories, a comprehensive accumulation of entrepreneurship abilities can be established. In overall perspective, entrepreneurship is all about risk-taking, and individuals involved in this business are always innovative, organizers, planners, leaders and creative followers. However, the preceding features of entrepreneurs are not fully comprehensive since it can clarify the reasons why some individuals develop entrepreneurship skills while others do not. The theories of entrepreneurships attempt to link entrepreneurship and profits. However, researchers like Schumpeter and Marshall who view an entrepreneur as an innovator fail to link the process of innovation and entrepreneurship in a situation whereby a new product/service has been introduced and profit is not realized. Adam Smith and Richard Cantillon are believed to be the pioneers of entrepreneurship as a field of study since late 17th century and early 18th century. They viewed the entrepreneur as an individual risk taker, deliberately allocating various resources with the aim of exploiting the available opportunities for maximum financial returns. An individual’s risk-taking is considered to be the main quality one should have in order to be considered an entrepreneur. Several theories elucidate the basis of entrepreneurship. Cantillon’s theory views an entrepreneur as a risk taker who brings supply and demand to equilibrium in the economy. The social enterprise school views entrepreneurship as a ‘social enterprise’ initiative, in which it refers an organization pursuing a double or a triple bottom line through the use of earned income approaches. The Kirzner’s ‘alert’ entrepreneur approach represented the Neo-Australian approach to entrepreneurship, which mainly focused on determining whether the market economy worked and the process that took the economy to equilibrium. According to Sociological Theories of Entrepreneurship, business risks are undoubtedly social units from the very start; since even single ventures indirectly include a choice not to share proprietorship with others in the launch procedure. Knight’s approach cites that the main function of the entrepreneur is to assume the uncertainty related to these events, thereby shielding all other stakeholders against the entrepreneur. References Bygrave, W. D., & Zacharakis, A. (2008). Entrepreneurship.Hoboken, NJ, John Wiley & Sons. CANTILLON, RICHARD. (1755). 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