Evaluation of the Influence of Risks on Entrepreneurship - Literature review Example

LITERATURE REVIEW: EVALUATION OF THE INFLUENCE OF RISKS ON ENTREPRENEURSHIP Evaluation of the influence of risks on entrepreneurship Customer Name: Lecturer Name: Date: The relationship that exists between risks perception and entrepreneurial ventures has been non conclusive in the past. There are diverse literatures and theories available on the impacts of risks on entrepreneurship, the dissimilarity of the concepts and conclusions suggested by the literature and the theories have complicated the way entrepreneurs consider and perceive risks. Consideration of risks in entrepreneurship gained popularity with the foundation of Frank Knight's Risk Bearing Theory which introduced a new dimension to entrepreneurship, Frank Knight’s (1885-1972) theory while adopting the theories of early economists such as Richard Cantillon and J B Say argues that risk taking is the most paramount characteristic of entrepreneurship and considers uncertainty as a factor of production, the profit earned by the entrepreneurs is as a result of taking risks by anticipating future events. Frank Knight’s view that risk taking is the most paramount characteristic of entrepreneurship, and that the profit earned by the entrepreneurs is as a result of taking risks has been supported by recent studies, authors such (Hisrich, 2009) have argued that entrepreneurs do take risks. The author further affirms that risk forms the basis of decision making, believing that there is a possibility of the occurrence of certain events in future is the source of risks since there is uncertainty in the occurrence of the perceived events, the risk taken by the entrepreneur is the source of business reward. Other researches suggest a close relationship between risk perception, entrepreneurship and business growth, Sayigh, (1962), evidently concluded that the business growth is a function of entrepreneurship behaviour. In the research, findings were conclusive that there was close relationship between business growth and entrepreneurship, apart from the quest for achievement the main entrepreneurship behaviour which influenced business success was risk taking. In support of Hisrich, (1992) the researcher illustrated that risk taking as a entrepreneurial behaviour is positively related with business success, however risk taking was not a panacea for business success. Sayigh, (1962), in his a research involving proprietors, most of the successful proprietors exhibited risk taking entrepreneurship behaviour and concludes that poor performance of entrepreneurial ventures is attributed to other factors than risk taking, he argues that mainly bad financial management, not risk taking is the cause of poor performance. The perception and argument that risks and entrepreneurship are correlated and inseparable is enhanced by the portfolio theory, which was developed and popularized by Markowitz (1952), Tobin (1958) and Sharpe (1964), the theory in agreement with Knight’s analysis and arguments documented optimistic affiliation between probable entrepreneurial return and risk. Arguing that profits can only be realized from true uncertainty; since it there existed certainty, everyone could venture hence no profits could be realized. Presenting that profits vanish when transformations become foreseeable, Yu, (2001) and Petrakis, (2003) collaborated the findings by presenting that entrepreneurial activation is positively concerned with uncertainty and risks, offering that the capital rate of return risk can sufficiently be used as pointer of entrepreneurship. The assertions of the above authors has not gone unchallenged, while appreciating the existence of risks, Alfred Marshall’s Theory of Entrepreneurship as well as Mark Casson's Economic Theory argues that the success of an entrepreneur depends on the prevailing economic situations Kuratko, (2008). In his "Principles of Economics," Alfred Marshall (1842 - 1924) argues that the main driving force behind entrepreneurship is innovations, where regardless of the risk situations, entrepreneur incessantly search for opportunities to minimize costs through supply of commodities while providing innovations and progress. Marshall however pointed out the importance of risks to entrepreneurship when he outlined the desirable characteristics of successful entrepreneur, which included the characteristic that an entrepreneur must posses a specialized ability which includes risk taking, identifying opportunities, knowledge of the trade and the power of forecasting, this view while recognizing the importance of risks in entrepreneurship however places risk taking as a miniature factor in entrepreneurship. The view that risks has very small influence on entrepreneurship, if any is shared by Mark Casson's Economic Theory, which argues that the success of an entrepreneur depends on the prevailing economic situations, and that the information available to an entrepreneur not necessarily the risk taking ability takes the centre stage in decision making by the entrepreneur. In this case, the entrepreneur exhibits an extreme form of believing that the totality of the information available to at their disposal in decision making in unique, and makes decisions contrary to what other persons are deciding on the same situation. Several other authors have agreed with the perception that it is the need to be unique, not necessarily taking risks, is the main influence in entrepreneurship where entrepreneurs believe that they are right while all the other persons are wrong. The essence of entrepreneurship is being different, and this is what makes the entrepreneur to be important, having a different perception of the situation hence being different. The findings have been collaborated by Brouwer, (2000). who argues that the difference in perception, impacts substantially on material allocation of resources. According to the view, the difference in perception is the main driving force, since entrepreneurs expects to make proceeds from the difference in perception by the entrepreneur taking a position vis-à-vis other people’s perception. Harper, (2006) is of the opinion that since an entrepreneur bets on his position, which he hopes to be rewarded when his position turns out to be correct, however contradictory it may be to other persons positions, this is an attribute of risk taking in itself, he further argues that the guts to hold unto a perceived correct position is a risk adventure in itself, therefore in essence entrepreneurship is driven by risk taking by the investor. The researchers who subscribe to the view held by Mark Casson's Economic Theory, deviate from the position proposed by Max Webber’s Sociological Theory, which proposes social cultures as the driving force of entrepreneurship, according to the theory, regardless of the persons risk taking or risk averse capability, role expectations of the society play an imperative role since entrepreneurs have to conform which such expectations, including customs, taboos and religious beliefs. The theory further presents religion as a main ingredient of entrepreneurship, arguing that an adventurous free-spirit and discipline defines successful entrepreneurship. Some authors have argued that being risk averse defines “adventurous free-spirit”. The theory is in itself however is silent on the actual role of risk on entrepreneurship. Joseph Schumpeter’s Innovation Theory, has been quoted in several studies as the suggesting that risks do not influence entrepreneurship rather innovation, foresight, and creativity influences entrepreneurship. According to the theory, risk is inconsequential as a factor affecting entrepreneurship, since the aforementioned factors are more profound in that the entrepreneurial task is to categorize innovative permutations and deriving profit by having correct combinations. In this case, the combinations are more important and not all business owners are entrepreneurs, their risk taking not withstanding, but rather how the owner tries out the above combinations to achieve a profit. Schumpeter, (1942) backed up the argument that innovations is the driving force behind entrepreneurship by suggesting the process of "creative destruction" which compel economic development, contradicting what was offered by Petrakis, (2003), that risk taking in cases of uncertainty compel economic development. Peter Drucker’s Theory of Entrepreneurship rather takes a conciliatory tone on the influence of risks on entrepreneurship, considering Joseph Schumpeter’s Innovation Theory and Frank Knight's Risk Bearing Theory, the theory holds that entrepreneurial behaviour, innovation and resources are the keys to entrepreneurship; entrepreneurial behaviour includes risk taking attribute. Learning is not a risk taking activity but an entrepreneur can learn from the risks taken, this is the view taken by Israel Kirtzner’s Theory of Entrepreneurship which proposes that learning is the driving force behind entrepreneurship, in the theory, alertness and spontaneous learning more influence entrepreneurship than risks. According to McClelland’s Theory of Achievement Motivation however, the need for achievement and need for power drive entrepreneurship, the risks undertaken by the entrepreneur to gain recognition are not as important as the recognition and achievement itself. Further research regarding the relationship between risks is entrepreneurship is therefore necessary, so as to present conclusive results. The theories while presenting different opinions and points of view have strong indications that their perceptions and positions are well researched, several well researched theories give different views on the influence of risks on entrepreneurship, this calls for further research. Read More