The theory is a set of properly argued ideas intended to explain facts or events. It is the principle on which a subject of study is based. The theory implies a relationship among observable bets and the integration of these facts in some meaningful way.
It offers an orientation for scientific inquiry by defining which facts are relevant and focusing on these while disregarding others. It is a means of classification and conceptualization. Theory imposes an observable system of categories and structure of concepts upon each set of facts.
It also enables people to summarize empirical generalizations and relationships among propositions. Through summary and uniformity of method, theory predicts points that might be observed under identical or similar circumstances.
What Are The Type Of Theories of Entrepreneurship?
Theories of entrepreneurship explain how it arises in a community. That is the reason responsible for the growth of entrepreneurship in society.
There are many dimensions of interpretation of the theories of entrepreneurship, which are classified in the following manner:
Sociological Theories of entrepreneurship
Sociological theories explain the growth of entrepreneurship in a particular community or society from the perspective of the effects of the interplay of social variables. The theories believe that entrepreneurship is the consequence of certain social factors.
However, the following discussions will illustrate the basic premises of various sociological theories of entrepreneurship:
- Religious Value Theory.
- Legitimacy Theory.
- Social Mobility Theory.
- Social Marginality Theory.
- Social Integrity Theory.
- Security Theory.
- Riggs’s Theory.
Socio-psychological theories of entrepreneurship
Socio-psychological theories explain the origin of the development of entrepreneurship in a particular community or society is the forces that have come from the culture and a psychological slate of the people.
The driving forces are highly psycho-social. Therefore, this group of theories is known as socio-psychological theories.
The theories of entrepreneurship are discussed below:
- Achievement Motivation Theory.
- Withdrawal of Status Report Theory.
- Innovation Theory.
Economic Theories of Entrepreneurship
Economic theories believe that entrepreneurship will grow in those situations where particular economic conditions are most favorable Economic incentives are the main drive for entrepreneurial activities.
The incentives and gains are regarded as the sufficient condition for the emergence of industrial entrepreneurship.
The economic theories of entrepreneurship are elaborated below:
- Risk Bearing Theory.
- X Efficiency Theory.
- Market Process.
Explain All Theories of Entrepreneurship
13 Theories of Entrepreneurship
Religious Value Theory
Max Weber (1917) presents the theory of religious value. He concludes from his observations of the contribution of the Protestant values of Christianity to the development of capitalism or entrepreneurship that religious value plays a vital role in developing entrepreneurship in a particular community or society.
Catholicism believes that the world is the testing ground for humans, and luxury, material gain, consumption, and accumulation of wealth are sins. This religious sanction upon economic activities retarded entrepreneurial growth in the Christian community during the medieval period in Europe.
John Calvin and Martin Luther pronounced a distinct interpretation of Christianity that associates material benefits with divine grace. They declare that God has created the earth for human benefit and welfare. Therefore, there is no sin in consumption and material gain, but luxury and austerity should be restricted to receive divine blessings.
They emphasized the inherent virtue of the work itself and considered a monetary reward or profit as blessings from God. They also state that God has chosen a few individuals to receive this grace.
This religious permission, contrasting with the existing sanction, is known as Protestantism, and these Protestant values triggered entrepreneurship in the Christian community. This value provides a foundation for economic motivation. Investment is regarded as a pleasure for higher output, while idleness and lethargy are seen as sins.
Work is seen as honorable, thus, Protestant ethics advocate awareness and attraction to material possessions on Earth. This plays a vital role in developing capitalism.
Based on this scenario, Max Weber concludes that favorable religious values are the primary contributors to the development of entrepreneurship in a particular society. Therefore, a society that is religiously permissive will experience increasing entrepreneurship.
Legitimacy Theory
The theory is proposed by Moms and Somerset (1971). It is supported by Cochran (1959), Kerzon, Alexander (1967), and others. The legitimacy of entrepreneurship theory opines that entrepreneurship is an outcome of social recognition and high esteem for entrepreneurial behavior and entrepreneurs.
This recognition is regarded as the legitimacy of entrepreneurship. Legitimacy refers to social norms or normative systems and evaluative systems that accept entrepreneurial behavior and inspire such behavior.
This favorable social environment promotes entrepreneurs and recognizes entrepreneurial activity in society.
Therefore, if social customs and values give high regard to entrepreneurship, society will experience the birth of entrepreneurship.
Thus, positive social attitudes towards business and technology are essential foundations for institutional, justificatory, and obligatory functions in a society that promotes entrepreneurship (Morris and Somerset, 1971).
Entrepreneurs must have high social status (Kerzon). Social values, if not positive, must at least not be negative towards entrepreneurship. There must be a change in social values that deter entrepreneurs (Cresent, 1967; McClelland and Winter, 1971). Cochran calls it cultural themes and sanctions.
The social status of those who are playing an entrepreneurial role has been considered one of the most important aspects of entrepreneurial legitimacy. Therefore, the relevance of a system of norms and values within a sociocultural setting is mandatory for the emergence of entrepreneurship.
Such a system is referred to as the legitimacy for entrepreneurship, in which the degree of approval or disapproval granted to entrepreneurial behavior influences its emergence and its characteristics if it does emerge.
Schumpeter (1934) also recognizes the importance of such legitimacy in terms of creating an appropriate social climate for entrepreneurship. So, the legitimacy of entrepreneurship is the driving force for the growth of entrepreneurship in a society.
Social Mobility Theory
Social mobility involves the degree of mobility, both social and geographical, and the nature of mobility channels within a system. Social mobility is an outcome of social values and norms.
Brechon (1960), Cameroon (1961), and Cazin (1964) have mentioned that high social mobility is an effective instrument for developing entrepreneurial activity in any society. This concept of entrepreneurship is regarded as the social mobility theory of entrepreneurship.
An open environment in a society fosters entrepreneurship. It requires the openness of a system and the need for flexibility in roles and relationships. Therefore, factors of mobility must not be restricted from playing a role in the economy. Existing aristocrats may block or create barriers in the path of factor mobility.
These sorts of obstructions hinder the growth and development of entrepreneurial activity. Social values and other cultural aspects establish norms where every person in the society would have the freedom of geographical and social mobility. This free environment favoring mobility is an essential requirement for the development of entrepreneurship.
Social Marginality Theory
Social marginality is the driving force for the expansion of entrepreneurship in a society. Brazen (1954), Kerr, Dunlop, and Harbison (1956), Mayef (1982), and Young (1971) have advocated this social marginality theory of entrepreneurship.
According to them, individuals or groups on the perimeter of a given social system or between two social systems provide the personnel to assume the entrepreneurial roles. They may be drawn from religious, cultural, ethnic, or migrant minority groups.
They opine that due to marginality, sudden psychological changes occur in marginal people that make entrepreneurship a special alternative avenue for them to gain entrance into the established mainstream of society.
That is the reason why minorities, immigrants, or other small ethnic groups show their entrepreneurial performance in different societies, which has made them a dominant force in those societies.
But the legitimacy of entrepreneurship and social mobility are the a priori conditions for the execution of the social marginality theory. The situations in which entrepreneurial legitimacy is low, mainstream people will be diverted to non-entrepreneurial roles, and the entrepreneurial roles will be relegated to the marginals.
On the contrary, high entrepreneurial legitimacy will attract mainstream individuals to assume entrepreneurship, and marginal individuals will have to find other roles as a means of mobility. In that case, there must be permissive social values for social mobility.
Several other factors are attributed to increasing the likelihood of marginals becoming entrepreneurs.
The presence of positive attitudes towards entrepreneurship within the group, a high degree of group solidarity or cohesion, and relative social blockage are the supportive environmental elements for the operation of the social marginality theory of entrepreneurship.
Therefore, social marginality is a prioritized condition for the development of entrepreneurial behavior and entrepreneurship in a particular society.
Social Integrity Theory
Morris and Somerset in 1971 put forward the concept of social integrity as a driving force for developing entrepreneurs. Community support inspires people to engage in entrepreneurial activity.
But they opine that prospective entrepreneurs should have assets and accessibility to the market. It brings those into entrepreneurship who play a normal role in the community.
Social integration promotes entrepreneurial behavior positively as it brings about a social bond with certain business communities or mainstream people. Winter (1971) also observes the same, “Integrity into a certain business community” is a vital factor for the growth of entrepreneurship in society.
The community provides necessary resources, normative support, and recognition to entrepreneurial activity with high regard and acceptance. A permissive society provides an opportunity for others to enter into the sources of resources and the market, which promotes entrepreneurial opportunities in society.
This will strongly motivate people to pursue an entrepreneurial role to develop entrepreneurship. Therefore, social integration is the primary situation that grows entrepreneurship in the community.
Security Theory
Easter Broke has propounded the security theory of entrepreneurship. He says that security is the basis for entrepreneurial growth. Security refers to both monetary and non-monetary supportive factors.
The theory believes that security is needed for the entrepreneurial, social, male, and political behavior of people. People need protection from uncertainty, want, social unacceptability, and political interference. Therefore, Brozen (1954) thinks that security is the most important element for the expansion of entrepreneurship.
How much security is needed is a debated issue. Cole (1959) opines for minimum security while McClelland (1961) favors moderate security. But Peterson and Burger (1971) opine that a tumultuous social condition promotes entrepreneurial activity.
Thus, full security is a deterrent to entrepreneurship. But everybody accepts that security in society is an a priori condition for the development and growth of entrepreneurship in any society.
Riggs’s Theory
Frederick W. Riggs (1964) has promoted a concept of entrepreneurship that states that a particular diffracted or prismatic society would promote entrepreneurship instead of a fused society that delimits entrepreneurship. Riggs differentiates three types of societies. They are:
- Fused society, where aristocrats impose strict restrictions on entrepreneurial activities for a certain sector of society, limiting entrepreneurs.
- Diffracted society, which nurtures universality, high social mobility, and flexibility. It promotes entrepreneurship and allows entrepreneurs to reach aristocratic status through mobility.
- Prismatic society, where aristocrats possess ambivalent values towards entrepreneurs – both positive and negative. In this society, rising entrepreneurs pose a threat to the aristocracy, and to protect themselves, some aristocrats enter into entrepreneurship, even if they do not necessarily like it.
Thus, the theory suggests that a society with permissive values towards entrepreneurship by the established aristocrats would facilitate entrepreneurship.
Achievement Motivation Theory
David C. McClelland (1961) characterized individuals with a high need for achievement as those preferring to be personally responsible for solving problems, setting goals, and reaching these goals through their efforts. He also said that these types of people have a strong desire to know how well they are accomplishing their tasks.
McClelland believes that entrepreneurs should have a high need for achievement. A high need for achievement does influence the decision to enter an entrepreneurial occupation. Persons with an increasing or high need for achievement are unusually active in entrepreneurial efforts.
McClelland identifies some unique characteristics of individuals with a high need for achievement. They are:
- Willingness to take moderate risks and a tendency to work hard under such conditions.
- Confidence or faith that his/her personal efforts would influence the achievement of some object and satisfaction out of that faith.
- Tendency to have a perception of success if there is a high success in one event.
- Need for an explanation for the success or failure of one’s efforts.
- Ability to plan ahead and understand the effects of time.
- Willingness to pursue quality for the sake of quality.
The high need for achievement is developed in a person by the family and culture in which he/she lives. A parent’s strong emotional bond with the children, high hopes for the children, and experience of achievement tremendously influence children to develop a need for achievement.
In short, according to McClelland, it is the high need for achievement that drives people towards entrepreneurial activities.
Withdrawal of Status Report Theory
The loss of status of a related community is the primary condition for entrepreneurial behavior. The suppressed mental loss and anger due to lost status raise a sense of achievement in the people of the community. The expression of these mental discontents is entrepreneurial activity.
This theory of withdrawal of status report is promoted by Everett E. Hagen in 1962. He opines that a community, clan, or tribe may lose its existing status by forced displacement, devaluation of prestigious symbols, departure due to incoherence with existing status or conditions, or non-acceptability to a new society.
The lost status would drive the people to regain it through entrepreneurial activity, which is a reflection of extreme mental dissatisfaction with the present status.
Hagen attributes the withdrawal of status respect of a group to the genesis of entrepreneurship. Giving a very brief sketch of the history of Japan, he concludes that it developed sooner than any non-western society except Russia due to historical differences.
First, Japan had been free from colonial disruption, and secondly, the repeated long continued withdrawal of expected status from important groups (Samurai) in her society drove them to retreatism, which caused them to emerge alienated from traditional values with increased creativity.
This fact led them to technological progress. Stonequist has also emphasized that technological innovations are caused more by culturally marginal persons than others. He refers to Jews, Greeks, and such persons in the Middle Ages as examples.
Hagen believes that the initial condition leading to eventual entrepreneurial behavior is the loss of status by a group. He postulates that status withdrawal would give rise to four possible reactions and create four different personality types:
- Retreatist: He who continues to work in society but remains indifferent to his work and position.
- Ritualist: He who adopts a kind of defensive behavior and acts in the way accepted and approved in his society but has no hopes of improving his position.
- Reformist: He is a person who foments a rebellion and attempts to establish a new society.
- Innovator: He is a creative individual and is likely to be an entrepreneur.
Hagen maintains that once status withdrawal has occurred, the sequence of changes in personality formation is set in motion
. He infers that status withdrawal takes a long period of time – as much as five or more generations – to result in the emergence of entrepreneurship.
Innovation Theory
The innovation theory of entrepreneurship is advocated by Joseph A. Schumpeter in 1934. Schumpeter opines that entrepreneurship is any kind of innovating function that could have a bearing on the welfare of an entrepreneur. He says, “An entrepreneur is an innovator of new combinations in the field of production.”
Innovation is a process of adding new utility to existing products or services.
It involves new production processes or techniques, new market creation, new sources of raw materials, new management strategies or techniques, new opportunities for investment and production, new sources of capital, new uses of old products, new organizations, and even finding resourceful and pragmatic managers for the new venture.
Thus, entrepreneurs try to increase productivity and profit through mixing and changing factors of production. They adopt invented or created things into work.
Entrepreneurship propounds a new way of addressing problems to discover an unthought-of means that effectively resolves the issue in favor of the entrepreneur or organization. Schumpeter (1934) argues that the discovered way must have a bearing upon the welfare of the entrepreneur.
That is, entrepreneurship should generate something of value to the entrepreneur. They should benefit from it. These benefits may be financial, psychic, or social, but they shall go in favor of the entrepreneur as a reward for entrepreneurship.
Thus, the innovation theory places entrepreneurship as a creative venture for the economic development of a country by unveiling ways and means of doing things in a new feasible way so that it could provide benefits and welfare to the entrepreneur and to society.
Risk-Bearing Theory
The risk-bearing theory of F. H. Knight (1921) propounded that entrepreneurs are a specialized group of persons who bear risks and deal with uncertainty. Uncertainty is defined as a risk that cannot be insured against and is incalculable.
On the other hand, the risk is calculable uncertainties that an entrepreneur takes into account to design a venture.
According to Knight, entrepreneurs are the economic functionaries who undertake such responsibility, which cannot be insured, capitalized, or salaried too. Only a committed person with an unbending mind can dare to go with such risky situations, and they are entrepreneurs.
Risk-taking or uncertainty-bearing implies assuming responsibility for the loss that may occur due to unforeseen contingencies of the future.
An entrepreneur provides or invests capital to establish and run the enterprise. They also guarantee specified sums to others in return for assignments made to them. The entrepreneur guarantees interest to lenders, employee wages, and landlord rents. After making payments to these persons, little or nothing may be left for the entrepreneur.
Therefore, an entrepreneur is an especially talented and motivated person who undertakes the risks of a business or venture. They visualize opportunities for introducing new ideas and handling economic uncertainty. They are enterprising individuals willing to assume the risks involved in innovations, new ventures, and the expansion of an existing venture.
Knight says that the supply of entrepreneurship involves three factors: ability, willingness, and power to extend guarantees about returns to others. Knight also identified the economic, social, and psychological factors that govern the supply of entrepreneurship.
But he emphasizes the most critical faculty of the entrepreneur that is vital for differentiating a person as an entrepreneur – risk-bearing. Therefore, he qualifies entrepreneurship as a risk-bearing activity ending in a successful venture.
X Efficiency Theory
The X-efficiency theory of H. Liebenstein (1966) states that entrepreneurship’s development or supply is governed by the inputs completing capacity of the people in society.
The most significant feature of entrepreneurship is gap filling. It is the job of the entrepreneur to fill the gap
or make up for the deficiencies that always exist in the knowledge about the production function. This results from the ever-changing character of the production technology to meet the increasing market demand in every economy as well as in the world economy as a whole.
These gaps or deficiencies also arise because all the inputs in the production function cannot be marketed. Some inputs like motivation and leadership are vague, and their output is indeterminate.
An entrepreneur has to marshal all the inputs to realize final products. Thus, entrepreneurship is a function of input completing and gap filling. This is the X-efficiency of entrepreneurship.
The entrepreneurial ability generates increasing wealth in the economy. It nurtures judgment, perseverance, and knowledge of the business environment, command of sufficient capital resources, and effective superintendence and administration to overcome uncertainty.
It organizes material and human resources to affect the production process to generate goods and services of difference that are required to fulfill the dynamic preference and choice of the market. The present state of knowledge is incapacitating to bridge the gap, but advanced, new, dynamic, and suitable technology and knowledge could handle the situation successfully.
With their creative, innovative, imaginative, motivational, and organizational power and ability, the entrepreneur dares to fill up the gap between the present and expected level of the production function.
This X-efficiency of entrepreneurship is the root of the development of entrepreneurial ventures in every economy. Therefore, such X-efficiency in society is vital for the growth and development of entrepreneurship in the economy.
Market Process Theory
The market process theory of F. A. Hayek (1944) implies that entrepreneurship is the outcome of the market mechanism that provides an opportunity to initiate a new venture for profit. The market is the avenue of scope to exercise the talents of hunting opportunities for unfulfilled demand for a commodity.
It may also give scope to participate in the operational process of marketing goods and services. Either of the situations is favorable to the development of entrepreneurship.
The market is perceived as a mechanism whereby buyers and sellers interact to determine the price of the commodity to effectuate exchange.
It involves a series of activities to discover demand for a commodity, make it available in the market, and inform the buyers so that they can participate in the interaction process of setting agreeable prices and other auxiliary functions required for the system’s smooth functioning.
The skillful participation of the genius and innovative achievement-oriented entrepreneur conducts the whole process. The scope offered by the market process is the genesis of entrepreneurial activities and the cause of the growth of entrepreneurship in an economy.
The market process theory entails entrepreneurship’s origin in the history of human civilization. The production of surplus goods in the agricultural age initiates trade by some innovative persons who transport goods to deficient areas for profit.
This exchange mechanism is the first scope for starting entrepreneurial operations in our world. The persons who initiated the operation are the first entrepreneurs too. The same market process is still a valid and opportune ground for entrepreneurship.
Thus, the theory states that an efficient market process or mechanism is the birth ground for entrepreneurship.
The economy that allows the process to operate without any unwanted interference and is facilitated by further actions would be the fertile premise for the growth and development of entrepreneurship.