Topic Three
THEORIES OF ENTREPRENEURSHIP
“Whenever you see a successful business, someone once took a courageous decision”.
Learning objectives
By the end of the topic the reader should be able to: -
i) Differentiate the theories of entrepreneurship
ii) Explain the theories that explain the entrepreneurial behaviour.
iii) Differentiate between classical economics and neo-classical economics.
The theories that explain entrepreneurship include:
i) Psychological Theory
ii) Social Theory
iii) Economic Theory
iv) The Resource Based Theory
v) Competence Based Theory
vi) Heterogeneous Demand Theory
vii) Transaction Based theory
viii) Industrial organisation Theory.
1. PSYCHOLOGICAL THEORY
The central focus of this perspective is that the entrepreneurs have unique values, attitudes
and need which drive them. People behave in accordance with their values irrespective of
different situations they might be in. People’s behaviour results from their attempts to satisfy
their unique needs and values. The psychological school focuses on personality factors
believing that entrepreneurs have unique values and attitudes towards work and life. These,
along with certain dominant needs propel the individual to behave in certain ways.
Entrepreneurs are’ therefore, different from non-entrepreneurs by personality characteristics.
Among the most frequent traits of entrepreneurs include the need for achievement, locus of
control and risk taking propensity which are discussed as follows:
i) The Need for Achievement or n-Ach
1
,The entrepreneurial need for achievement or n-Ach was first identified as a personality trait
by McClelland (1961), in his work of economic development. People with high levels of n-
Ach have a strong desire to solve problems, enjoy setting goals and achieving them through
their own efforts and like receiving feedback on how they are doing. They are moderate risk
takers.
ii) Locus of control
It’s a trait associated with entrepreneurship in locus of control we have two types:
a) External-those who believe that what happens to them is ass results of fate, chance,
luck or forces beyond their control.
b) Internal are those who believe that for the most part of the future is theirs to control
through their own effort. Clearly people who undertake a new business must believe
that their effort will have something to do with the business future performance.
Entrepreneurs have internal than external locus of control.
iii) Risk Taking Propensity
It’s defined as the perceived probability of receiving rewards associated with success of a
proposed venture which is required by an individual before he/she will subject himself /
herself to the consequences associated with failure (Brockuhaus, 1980)
Entrepreneurs acquire their values, attitudes and needs as they grow up from families,
schools, churches and community as well as the surrounding culture in general. These values
are learned and internalized and reflect the process of socialization into culture. Since these
values and needs are learned early in life and are well established prior to adulthood,
entrepreneurial characteristics can only be re-enforced in those who portray them or have
them in latent form. It would not be effective to try and develop them people who do not
possess them but re-enforce in those who already have them. The extreme aspect of this
perspective further suggests that the entrepreneur has the ability- a sixty sense-and traits and
instincts he/she is born with. Entrepreneurs portray intuition, vigour, energy, persistence and
self-esteem. Entrepreneurs according to this version are born and as they have natural
abilities, training and cannot influence them in any way.
2. SOCIOLOGICAL THEORY
It tries to explain the social conditions from which entrepreneurs emerge and the social
factors that influence the decision. The following depicts the decision to become an
2
, entrepreneur which is a function of two factors. The impetus of momentum factors and the
situational factors, (Dollinger, J.1999)
Impetus for Entrepreneurship
There are four factors that propel people to self-employment
i) Negative displacement
It’s the marginalization of individuals or groups of individuals from the core of society for
example is the tendency of immigrants to become entrepreneurs, for instance Somali and
Jewish immigrants turn to entrepreneurship. Other negative displacement result from being
fired from a job or being angered or bored by current employment. Middle age or divorce can
also provide the impetus for new venture creation.
ii) Between Things
People who are between things are also likely to seek entrepreneurial outlets than those who
are in the “middle of things” like immigrants, people who are between things are sometimes
outsiders e.g. between military and civilian life, between student life and career and between
prison and freedom.
iii) Positive pull
Are called positive pull influence, can come from potential partner, a mentor, a parent an
investor or a customer. The potential parties encourage the individual with the offer of
sharing the experience, helping with the work and spreading the risk. The mentor raises self-
esteem and confidence.
iv) Positive push
It includes such things as a career path that offers entrepreneurial opportunities or an
education that gives the individual the appropriate knowledge and opportunity. Two types of
career paths can lead to entrepreneurship. The first is the industry path. A person prepares
himself for a job or a career in a particular industry and learns everything is to know about
that industry. But due to the dynamics of the industry, it creates a gap that can be exploited by
a person who is knowledgeable in that industry. The second path is the sentry path which
emphasises the money and the deal. People with careers in sentry positions see many
different opportunities in many different industries. They tend to be lawyers, consultants,
3
THEORIES OF ENTREPRENEURSHIP
“Whenever you see a successful business, someone once took a courageous decision”.
Learning objectives
By the end of the topic the reader should be able to: -
i) Differentiate the theories of entrepreneurship
ii) Explain the theories that explain the entrepreneurial behaviour.
iii) Differentiate between classical economics and neo-classical economics.
The theories that explain entrepreneurship include:
i) Psychological Theory
ii) Social Theory
iii) Economic Theory
iv) The Resource Based Theory
v) Competence Based Theory
vi) Heterogeneous Demand Theory
vii) Transaction Based theory
viii) Industrial organisation Theory.
1. PSYCHOLOGICAL THEORY
The central focus of this perspective is that the entrepreneurs have unique values, attitudes
and need which drive them. People behave in accordance with their values irrespective of
different situations they might be in. People’s behaviour results from their attempts to satisfy
their unique needs and values. The psychological school focuses on personality factors
believing that entrepreneurs have unique values and attitudes towards work and life. These,
along with certain dominant needs propel the individual to behave in certain ways.
Entrepreneurs are’ therefore, different from non-entrepreneurs by personality characteristics.
Among the most frequent traits of entrepreneurs include the need for achievement, locus of
control and risk taking propensity which are discussed as follows:
i) The Need for Achievement or n-Ach
1
,The entrepreneurial need for achievement or n-Ach was first identified as a personality trait
by McClelland (1961), in his work of economic development. People with high levels of n-
Ach have a strong desire to solve problems, enjoy setting goals and achieving them through
their own efforts and like receiving feedback on how they are doing. They are moderate risk
takers.
ii) Locus of control
It’s a trait associated with entrepreneurship in locus of control we have two types:
a) External-those who believe that what happens to them is ass results of fate, chance,
luck or forces beyond their control.
b) Internal are those who believe that for the most part of the future is theirs to control
through their own effort. Clearly people who undertake a new business must believe
that their effort will have something to do with the business future performance.
Entrepreneurs have internal than external locus of control.
iii) Risk Taking Propensity
It’s defined as the perceived probability of receiving rewards associated with success of a
proposed venture which is required by an individual before he/she will subject himself /
herself to the consequences associated with failure (Brockuhaus, 1980)
Entrepreneurs acquire their values, attitudes and needs as they grow up from families,
schools, churches and community as well as the surrounding culture in general. These values
are learned and internalized and reflect the process of socialization into culture. Since these
values and needs are learned early in life and are well established prior to adulthood,
entrepreneurial characteristics can only be re-enforced in those who portray them or have
them in latent form. It would not be effective to try and develop them people who do not
possess them but re-enforce in those who already have them. The extreme aspect of this
perspective further suggests that the entrepreneur has the ability- a sixty sense-and traits and
instincts he/she is born with. Entrepreneurs portray intuition, vigour, energy, persistence and
self-esteem. Entrepreneurs according to this version are born and as they have natural
abilities, training and cannot influence them in any way.
2. SOCIOLOGICAL THEORY
It tries to explain the social conditions from which entrepreneurs emerge and the social
factors that influence the decision. The following depicts the decision to become an
2
, entrepreneur which is a function of two factors. The impetus of momentum factors and the
situational factors, (Dollinger, J.1999)
Impetus for Entrepreneurship
There are four factors that propel people to self-employment
i) Negative displacement
It’s the marginalization of individuals or groups of individuals from the core of society for
example is the tendency of immigrants to become entrepreneurs, for instance Somali and
Jewish immigrants turn to entrepreneurship. Other negative displacement result from being
fired from a job or being angered or bored by current employment. Middle age or divorce can
also provide the impetus for new venture creation.
ii) Between Things
People who are between things are also likely to seek entrepreneurial outlets than those who
are in the “middle of things” like immigrants, people who are between things are sometimes
outsiders e.g. between military and civilian life, between student life and career and between
prison and freedom.
iii) Positive pull
Are called positive pull influence, can come from potential partner, a mentor, a parent an
investor or a customer. The potential parties encourage the individual with the offer of
sharing the experience, helping with the work and spreading the risk. The mentor raises self-
esteem and confidence.
iv) Positive push
It includes such things as a career path that offers entrepreneurial opportunities or an
education that gives the individual the appropriate knowledge and opportunity. Two types of
career paths can lead to entrepreneurship. The first is the industry path. A person prepares
himself for a job or a career in a particular industry and learns everything is to know about
that industry. But due to the dynamics of the industry, it creates a gap that can be exploited by
a person who is knowledgeable in that industry. The second path is the sentry path which
emphasises the money and the deal. People with careers in sentry positions see many
different opportunities in many different industries. They tend to be lawyers, consultants,
3
