Theories of entrepreneurship
Theories explain where entrepreneurs come from: innovation (Schumpeter), achievement need (McClelland), status withdrawal (Hagen), religion (Weber) and alertness (Kirzner).
Theories at a glance
| Theory | Proponent | Core idea |
|---|---|---|
| Risk-bearing (early) | Richard Cantillon, 18th century | Buys at certain prices, sells at uncertain prices |
| Innovation theory (economic) | Joseph Schumpeter, 1911/1934 | The entrepreneur carries out 'new combinations'; creative destruction drives development |
| Risk and uncertainty (economic) | Frank Knight, 1921 | Profit rewards bearing uncertainty that cannot be insured |
| X-efficiency or gap-filling (economic) | Harvey Leibenstein, 1968 | Entrepreneurs fill gaps and complete inputs in imperfect markets |
| Alertness theory (economic) | Israel Kirzner, 1973 | Entrepreneurs are alert to unnoticed profit opportunities and move markets towards equilibrium |
| Need for achievement (psychological) | David McClelland, 1961 | High n-Ach makes people enterprising; it can be raised by training |
| Withdrawal of status respect (sociological) | Everett Hagen, 1962 | A group that loses social status turns creative to regain respect |
| Religious belief (sociological) | Max Weber, 1904-05 | Protestant values of hard work and thrift created the spirit of capitalism |
| Cultural values (sociological) | Thomas Cochran | Society's values and role expectations shape the supply of entrepreneurs |
| Behavioural model | John Kunkel | Entrepreneurial activity depends on social structure and its rewards and penalties |
Schumpeter's five 'new combinations'
| No. | Innovation | Example |
|---|---|---|
| 1 | A new product or a new quality of product | Electric scooters |
| 2 | A new method of production | The moving assembly line |
| 3 | A new market | Indian generic medicines sold in Africa |
| 4 | A new source of raw material or supply | A cheaper source of lithium |
| 5 | A new organisation of an industry | Amul's cooperative model replacing middlemen |
Schumpeter vs Kirzner
A classic NET contrast: Schumpeter breaks equilibrium, Kirzner restores it.
Points NET picks up
- Schumpeter separated the entrepreneur (innovator) from the capitalist (who supplies funds) and from the routine manager.
- 'Creative destruction' appears in Schumpeter's Capitalism, Socialism and Democracy (1942).
- McClelland's three needs are achievement, power and affiliation; n-Ach is learnt, not inborn.
- McClelland tested achievement-motivation training on businessmen in Kakinada, Andhra Pradesh.
- Hagen: over generations, a group whose status is withdrawn may produce creative, innovative individuals.
- Drucker (Innovation and Entrepreneurship, 1985): entrepreneurship is a practice based on systematic innovation, not a personality trait.
NET asks you to match theorists with their key idea (Schumpeter-innovation, McClelland-n-Ach, Hagen-status withdrawal, Weber-religion, Kirzner-alertness, Knight-uncertainty) and to separate economic, psychological and sociological theories.
Typical MCQ: “Which theorist said the entrepreneur is alert to unnoticed profit opportunities?” Israel Kirzner (1973). Trap: Schumpeter's entrepreneur innovates and disturbs equilibrium.
Typical MCQ: “Which theory links entrepreneurship to the withdrawal of status respect?” Everett Hagen's theory of social change (1962).
Schumpeter-Innovation, McClelland-Achievement, Hagen-Status, Weber-Worship (religion), Kirzner-Alertness, Knight-Uncertainty.