3 Major Theories of Entrepreneurship | Explained

Schumpeter Dynamic Entrepreneurship Innovation Theory

The innovative theory is one of the most famous theories of entrepreneurship used all around the world. The theory was advanced by one famous scholar, Schumpeter, in 1991. Schumpeter believes that creativity or innovation is the key factor in any entrepreneur’s field of specialization.

He argued that knowledge can only go a long way in helping an entrepreneur to become successful. He believed development consisted of a process that involved the reformation of various types of equipment for production, outputs, marketing, and industrial organizations.

However, Schumpeter viewed innovation along with knowledge as the main catalysts of successful entrepreneurship. He believed that creativity was necessary if an entrepreneur was to accumulate a lot of profits in a heavily competitive market. The concept of innovation and its corollary development embraces five functions:

  • Introduction of a new good
  • Introduction of a new method of production
  • Opening of a new market
  • Conquest of a new source of supply of raw materials and
  • Carrying out of a new organization in any industry.

Schumpeter represents a synthesis of different notions of entrepreneurship. His concept of innovation included elements of risk-taking, superintendence, and co-ordination. In practice, the new combination theory covers five cases which are given below:

  • The introduction of a new good which consumers, are not yet familiar with or of a new quality of a good.

  • The introduction of a new method of production, that one has not yet tested by experience in the branch of manufacture concerned, which need by no means be founded upon a discovery scientifically new and can also exist in a new way of handling a commodity commercially.

  • The opening of a new market i.e. a market into which the particular branch of manufacture of the country in question has not previously entered, whether or not this market has existed before.

  • The conquest of a new source of supply of raw materials or half-manufactured goods, irrespective of whether this source already exists or whether it has first been created.

  • The carrying out of the new organization of any industry like the creation of a monopoly position (for example, through justification) or the breaking up of a monopoly position.

According to Schumpeter

  • Development is not an automatic process but must be deliberately and actively promoted by some agency within the system. Schumpeter called the agent who initiates the above as an entrepreneur.

  • He is the agent who provides economic leadership that changes the initial conditions of the economy and causes discontinuous dynamic changes.

  • By nature, he is neither technician, nor a financier but he is considered an innovator.

  • Entrepreneurship is not a profession or a permanent occupation and therefore, it cannot formulate a social class like capitalist.

  • Psychological, entrepreneurs are not solely motivated by profit

Features of Schumpeter Theory

  • The high degree of risk and uncertainty in the Schumpeterian World.
  • Highly motivated and talented individual
  • Profit is merely a part of the objectives of entrepreneurs
  • Progress under capitalism is much slower than actually it is
  • It is leadership rather than ownership that matters.

Limitations of Schumpeter Theory

Many business people support this theory, and hence its popularity over other theories of entrepreneurship. However, These are the limitations of schumpeter theory:

  1. It excludes individuals who merely operate an established business without performing innovative functions.

  2. Innovating entrepreneur represents the most vigorous type of enterprise. However, this type of entrepreneur is rarely available in developing countries like India.

  3. It laid too much emphasis on innovative functions. But it ignores the risk-taking and organizing aspects of entrepreneurship.

  4. It assumes an entrepreneur as a large-scale businessman. He is a person who creates something new. But in practice, an entrepreneur cannot have large-scale operations from the very beginning.

  5. It fails to provide a suitable answer to questions like why some countries had more entrepreneurial talent than others.

According to Schumpeter, entrepreneurs are not a class in themselves like capitalists and workers. An individual is an entrepreneur only when he actually carries out new combinations and ceases to be an entrepreneur the moment he settles down to running the established business.

According to Schumpeter, an entrepreneur exists only if the factors of production are combined for the first time. Maintenance of a combination is not an entrepreneurial activity.

In this way, combination theory differs from the theory of rent formulated by Ricardo. Ricardo included the term “entrepreneurial ability” as an independent factor of production and it is concerned with profit. Thus, this theory fails to provide suitable solutions to the problems.

Theory of High Achievement by McClelland

McClelland’s theory of needs is one such theory that explains this process of motivation by breaking down what and how needs are and how they have to be approached. David McClelland was an American Psychologist who developed his theory of needs or Achievement Theory of Motivation which revolves around three important aspects, namely, Achievement, Power, And Affiliation.

This theory was developed in the 1960s and McClelland points out that regardless of our age, sex, race, or culture, all of us possess one of these needs and are driven by it. This theory is also known as the Acquired Needs as McClelland put forth that the specific needs of an individual are acquired and shaped over time through the experiences he has had in life.

Psychologist David McClelland advocated the Need theory, also popular as the Three Needs Theory. This motivational theory states that the needs for achievement, power, and affiliation significantly influence the behavior of an individual, which is useful to understand from a managerial context.

This theory can be considered an extension of Maslow’s hierarchy of needs. Per McClelland, every individual has these three types of motivational needs irrespective of their demography, culture, or wealth. These motivation types are driven by real-life experiences and the views of their ethos.

McClelland identified two characteristics of entrepreneurship. First doing things in a new and better way. Secondly, decision-making under uncertainty. This motive is called the tendency to strive for success in situations involving an evaluation of one’s performance in relation to some standard of excellence. People who have high need for achievement are more likely to succeed as entrepreneurs.

According to McClelland, individuals with high need achievement will not be motivated by monetary incentives but monetary rewards will constitute a symbol of achievement for them.

Similarly, they are also not interested much in social recognition or prestige but their ultimate goal is personal accomplishment. That is why McClelland suggests that in order to raise the level of achievement motivation, parents should set high standards for their children.

Need For Achievement

The need for achievement as the name itself suggests is the urge to achieve something in what you do. If you are a lawyer it is the need to win cases and be recognized, if you are a painter it is the need to paint a famous painting.

It is the need that drives a person to work and even struggle for the objective that he wants to achieve. People who possess high achievement needs are people who always work to excel by particularly avoiding reward low-risk situations and difficult-to-achieve high-risk situations.

Need For Power

The need for power is the desire within a person to hold control and authority over another person and influence and change their decision in accordance with his own needs or desires. The need to enhance their self-esteem and reputation drives these people and they desire their views and ideas to be accepted and implemented over the views and ideas of others.

These people are strong leaders and can be best suited to leading positions. They either belong to Personal or Institutional power motivator groups. If they are a personal power motivator they would have the need to control others and an institutional power motivator seeks to lead and coordinate a team towards an end.

Need For Affiliation

The need for affiliation is the urge of a person to have interpersonal and social relationships with others or a particular set of people. They seek to work in groups by creating friendly and lasting relationships and have the urge to be liked by others. They tend to like collaborating with others to competing with them and usually avoid high-risk situations and uncertainty The individuals motivated by the need for affiliation prefer being part of a group.

They like spending their time socializing and maintaining relationships and possess a strong desire to be loved and accepted. These individuals stick to basics and play by the books without feeling a need to change things, primarily due to a fear of being rejected.

Using Theory

McClelland’s theory can be applied to manage the corporate teams by being identifying and categorizing every team member amongst the three needs. Knowing their attributes may certainly help to manage their expectations and run the team smoothly.

Theory of Personal Resourcefulness

According to this theory, the root of the entrepreneurial process can be traced to the initiative taken by some individuals to go beyond the existing way of life. The emphasis is on initiative rather than reaction, although events in the environment may have provided the trigger for the person to express initiative.

This aspect seems to have been subsumed within ‘innovation’ which has been studied more as the ‘change’ or ‘newness’ associated with the term rather than ‘pro-activeness’.

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