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Entrepreneurship is the process of starting a business, a startup company or other organization. The entrepreneur develops a business plan, acquires the human and other required resources, and is fully responsible for its success or failure.[1] Entrepreneurship operates within an entrepreneurship ecosystem.
Etymology and historical usage
First used in 1723, today the term entrepreneur implies qualities of leadership, initiative and innovation in business. Economist Robert Reich has called team-building, leadership, and management ability essential qualities for the entrepreneur.[7][8]
An entrepreneur is a factor in microeconomics, and the study of entrepreneurship reaches back to the work in the late 17th and early 18th centuries of Richard Cantillon and Adam Smith, which was foundational to classical economics.
In the 20th century, entrepreneurship was studied by Joseph Schumpeter in the 1930s and other Austrian economists such as Carl Menger, Ludwig von Mises and Friedrich von Hayek. The term "entrepreneurship" was coined around the 1920s, while the loan from French of the word entrepreneur dates to the 1850s.
Initially, economists made the first attempt to study the entrepreneurship concept in depth[9] Richard Cantillon (1680-1734) considered the entrepreneur to be a risk taker who deliberately allocates resources to exploit opportunities in order to maximize the financial return.[10][11] Cantillon emphasized the willingness of the entrepreneur to assume risk and to deal with uncertainty. Thus, he draws attention to the function of the entrepreneur, and distinguishes clearly between the function of the entrepreneur and the owner who provides the money.[10][12] Alfred Marshall viewed the entrepreneur as a multi-tasking capitalist. He observed that in the equilibrium of a completely competitive market, there was no spot for “entrepreneurs” as an economic activity creator.[13]
Historical barriers to entrepreneurship
Dating back to the time of the medieval Guild in Germany, a craftsman required special permission to operate as an entrepreneur was the small proof of competence (Kleiner Befähigungsnachweis), which restricted training of apprentices to craftsmen who held a Meister certificate. This institution was introduced in 1908 after a period of so-called freedom of trade (Gewerbefreiheit, introduced in 1871) in the German Reich. However, the small proof of competence was not required to start a business. In 1935 and in 1953, the greater proof of competence was reintroduced (Großer Befähigungsnachweis Kuhlenbeck) and required that craftsmen obtain a Meister certificate to train apprentices and before being permitted to set up a new business.[14]
Definition
Entrepreneur (Listeni/ˌɒntrəprəˈnɜr/), is a loanword from French.[15] It is defined as an individual who organizes or operates a business or businesses. Credit for coining the term entrepreneur generally goes to the French economist Jean-Baptiste Say, but in fact the Irish-French economist Richard Cantillon defined it first[16] in his Essai sur la Nature du Commerce en Général, or Essay on theNature of Trade in General, a book William Stanley Jevons considered the "cradle of political economy"[17] Cantillon used the term differently. Biographer Anthony Breer noted that Cantillon saw the entrepreneur as a risk-taker while Say considered the entrepreneur a "planner".
Cantillon defined the term as a person who pays a certain price for a product and resells it at an uncertain price: "making decisions about obtaining and using the resources while consequently admitting the risk of enterprise." The word first appeared in the French dictionary entitled "Dictionnaire Universel de Commerce" compiled by Jacques des Bruslons and published in 1723.[18]
Successful entrepreneurs have the ability to lead a business in a positive direction by proper planning, to adapt to changing environments and understand their own strengths and weakness.[19]
Skill set
The entrepreneur is commonly seen as an innovator — a generator of new ideas and business processes.[21] Management skill and strong team building abilities are often perceived as essential leadership attributes for successful entrepreneurs.[22] Political economist Robert Reich considers leadership, management ability, and team-building to be essential qualities of an entrepreneur.[23][24]
Joseph Schumpeter[edit] According to Schumpeter, an entrepreneur is willing and able to convert a new idea or invention into a successful innovation.[25] Entrepreneurship employs what Schumpeter called "the gale of creative destruction" to replace in whole or in part inferior offerings across markets and industries, simultaneously creating new products and new business models. Thus, creative destruction is largely responsible for long-term economic growth. The idea that entrepreneurship leads to economic growth is an interpretation of the residual in endogenous growth theory[clarification needed] and as such continues to be debated in academic economics. An alternate description by Israel Kirzner suggests that the majority of innovations may be incremental improvements such as the replacement of paper with plastic in the construction of a drinking straw that require no special qualities.
For Schumpeter, entrepreneurship resulted in new industries and in new combinations of currently existing inputs. Schumpeter's initial example of this was the combination of a steam engine and then current wagon making technologies to produce the horseless carriage. In this case the innovation, the car, was transformational, but did not require the development of dramatic new technology. It did not immediately replace the horse-drawn carriage, but in time, incremental improvements reduced the cost and improved the technology, leading to the modern auto industry.
Despite Schumpeter's early 20th-century contributions, traditional microeconomic theory did not formally consider the entrepreneur in its theoretical frameworks (instead assuming that resources would find each other through a price system). In this treatment the entrepreneur was an implied but unspecified actor, consistent with the concept of the entrepreneur being the agent of x-efficiency.
For Schumpeter, the entrepreneur did not bear risk: the capitalist did. Schumpeter believed that the equilibrium ideal was imperfect Schumpeter (1934) demonstrated that changing environment continuously provides new information about the optimum allocation of resources to enhance profitability some individuals acquire the new information before others, recombine the resources to gain an entrepreneurial profit. Schumpeter was of the opinion that entrepreneurs shift the Production Possibility Curve to a higher level using innovations.[26]
Risk-taking
Theorists Frank Knight[27] and Peter Drucker defined entrepreneurship in terms of risk-taking. The entrepreneur is willing to put his or her career and financial security on the line and take risks in the name of an idea, spending time as well as capital on an uncertain venture. Knight classified three types of uncertainty:
Risk, which is measurable statistically (such as the probability of drawing a red color ball from a jar containing 5 red balls and 5 white balls). Ambiguity, which is hard to measure statistically (such as the probability of drawing a red ball from a jar containing 5 red balls but with an unknown number of white balls). True uncertainty or Knightian uncertainty, which is impossible to estimate or predict statistically, such as the probability of drawing a red ball from a jar whose number of red balls is unknown as well as the number of other colored balls. Entrepreneurship is often associated with true uncertainty, particularly when it involves something truly novel, such as a market that did not previously exist.
Traditional economic theory did not factor in the concept of entrepreneurship, a gap remedied by the work of William Baumol and others.
Psychological make-up
Stanford University economist Edward Lazear found in a 2005 study that variety in education and work experience was the most important trait that distinguished entrepreneurs from non-entrepreneurs[33] A 2013 study by Uschi Backes-Gellner of the University of Zurich and Petra Moog of the University of Siegen in Germany found that a diverse social network was also important in distinguishing students who would go on to become entrepreneurs[34][35]
Studies show that the psychological propensities for male and female entrepreneurs are more similar than different. Empirical studies suggest that female entrepreneurs possess strong negotiating skills and consensus-forming abilities.[7]
Jesper Sørensen wrote that significant influences on the decision to become an entrepreneur are workplace peers and social composition. Sørensen discovered a correlation between working with former entrepreneurs and how often these individuals become entrepreneurs themselves, compared to those who did not work with entrepreneurs.[36] Social composition can influence entrepreneurialism in peers by demonstrating the possibility for success, stimulating a “He can do it, why can’t I?” attitude. As Sørensen stated, “When you meet others who have gone out on their own, it doesn’t seem that crazy.”[37]
As per Cattell’s personality framework, both personality traits and attitudes are thoroughly investigated by psychologists. However, in case of entrepreneurship research, these notions are employed by academics too, but vaguely. According to Cattell, personality is a system that is related to the environment. He further adds that the system seeks explanation to the complex transactions conducted by both - traits and attitudes. This is because both of them bring about change and growth in a person.
So, personality is that which informs what an individual will do when faced with a given situation. Simply put, a person’s response is triggered by his/her personality and the situation faced.[38]
Innovative entrepreneurs may be more likely to experience what psychologist, Mihaly Csikszentmihalyi calls flow. Flow occurs when an individual forgets about the outside world given a powerful insight. Csikszentmihalyi suggested that breakthrough innovations occur at the hands of individuals in that state.[39] Other research has concluded that a strong internal motivation is a vital ingredient for breakthrough innovation.[40] Flow can be compared to Maria Montessori's concept of normalization, a state that includes a child’s capacity for joyful and lengthy periods of intense concentration.[41] Csikszentmihalyi acknowledged that Montessori’s prepared environment offers children opportunities to achieve flow.[42] Thus quality and type of early education may influence entrepreneurial capability.