Tuesday, February 28, 2006

Entrepreneurship Development: Concept and Context

Many developing countries including India are in a state of transition. They are striving to move from a subsistence-oriented, tightly integrated, inward looking local economy to a surplus seeking, market led, outward looking economy. Such a move is possible only with the emergences of a multitude of a small-scale and rural enterprise in all works of life. This requires building up of a wider base of population capable of entrepreneurial behaviour. If we take India as an example in the context of development, we find that the initial build up of entrepreneurial activity took place in urban center. This was followed by a trickle down effect in rural communities over time. Development strategy today, however, seeks a more proactive and immediate change in India. While much of policy making in this regard treats enterprise creation as a function of appropriate economic conditions(made possible through institutional and economic interventions), others have emphasized training and attitude change as vital elements in the process. But it needs systematic observations and research into the process through which entrepreneurship emerges and sustains itself.


Enterprises and entrepreneurs have been in the center stage of modernization since the days of Industrial Revolution. Economists, sociologists, psychologists and anthropologists have studied this concept, usually within the frontiers of their respective disciplines.

Models of entrepreneurship and research associated with them have identified several major issues such vagueness in definition, conceptualizing entrepreneurship as a trait, significance of innovation in entrepreneurship, meaning of activities in the post-enterprise creation stage, validity of measures of entrepreneurial propensity and significance of demographic factors.


Evolution, Frontiers, divergence & Stagnation

For a long time there was no equivalent for the term ‘entrepreneur’ in the English language. Three words were commonly used to connote the sense the French term carried: adventurer, undertaker and projector; these were used interchangeably and lacked the precision and characteristics of a scientific expression (Gopakumar, 1995).

Richard Cantillon (1680-1734), gave the concept some analytical treatment and assigned the entrepreneur an economic role by emphasizing on ‘risk’ as a prominent entrepreneurial function (Gopakumar, 1995).

J.B say and J.H. von Thunen. Jean Baptiste say (1767-1832), the French political economist assigned the entrepreneur with a crucial role-‘coordination’ and made a distinction between the entrepreneur and capitalist (Say,1967).

A dynamic theory of entrepreneurship was first advocated by Schumpeter (1949) who considered entrepreneurship as the catalyst that disrupts the stationary circular flow of the economy and thereby initiates and sustains the process of development. Embarking upon ‘new combinations’ of the factors of production-which he succinctly terms innovation-the entrepreneur activates the economy to a new level of development. The concept of innovation and its corollary development embraces five functions: 1) introduction of a new good, 2) introduction of a new method of production, 3) opening of a new market, 4) conquest of a new source of supply of raw materials and 5) carrying out of a new organization of any industry. Schumpeter represents a synthesis of different notions of entrepreneurship. His concept of innovation included the elements of risk taking, superintendence and coordination. However, Schumpeter stressed the fact that these attributes unaccompanied by the ability to innovate would not be sufficient to account for entrepreneurship (Gopakumar, 1995).

According to the Havard School (Cole,1949) entrepreneurship comprises any purposeful activity that initiate, maintain or develop a profit-oriented business in interaction with internal situation of the business or with the economic, political and social circumstances surrounding the business. This approach emphasized two types of activities: the organization or coordination activity, and the sensitivity to the environmental characteristics that effect decision making.

Despite its stress on the human factor in the production system, the Havard tradition never explicitly challenged the equilibrium – obsessed orthodox economic theory. This was challenged by the neo-Austrian School who argued that disequilibrium, rather than equilibrium, was the likely scenario and as such, entrepreneurs operate under fairly uncertain circumstances. The essence of entrepreneurship consists in the alertness of market participants to profit opportunities. A typical entrepreneur, according to Kirzner (1979) is the arbitrageur, the person who discovers opportunity at low prices and sells the same items at high prices because of intertemporal and interspatial demands.

To sum up, major theories and expositions from Cantillon to Kirzner view the entrepreneur as performing various functional roles as risk taker, decision maker, organizer or coordinator, innovator, employer of factors of production, gap seeker and input completer, arbitrageur, etc. The most appropriate definition of entrepreneurship that would fit into the rural development context, argued here, is the broader one, the one which defines entrepreneurship as: “a force that mobilizes other resources to meet unmet market demands”, “the ability to create and build something from practically nothing”, “the process of creating value by pulling together a unique package of resources to exploit an opportunity”.


Alternative Approaches


Socio-Cultural Approaches

Some scholars have stressed the importance of socio-cultural milieu in entrepreneurship development. They suggested that the socio-cultural history accounts for the performance of entrepreneurial functions by a considerable number of individuals.

Several writers have used a comparative framework to highlight the ways in which different societies, with differing interests, attitudes, systems of stratification and the like, operate to produce different kinds of businessmen and different patterns of entrepreneurial behaviour (Swayer,1952).

Psychological Approaches

The focus in entrepreneurship shifted from the act to the actors (Shacer & Scott,1991) in the work of McClelland(1961). According to McClelland and Winter(1969) need for achievement (n-Ach) is responsible for economic development. Greater the development of n-Ach, during early socialization of people, the more likely the economic development will be achieved. A society with a generally high level of n-Ach will produce more rapid economic growth. Achievement motivation could be included through training in self reliance, rewarding hard work and persistence in goal achievement, and creating interest in excellence. In spite of being criticized (Schatz,1971; Smelser,1976), McClelland’s(1987) analysis has triggered off the ‘traits approach’ to comprehended entrepreneurial behaviour.

In another psycho-social theory Hagen(1962) relegates economic variables to a relatively minor role and has put an emphasis on certain aspects of the personality. More recently, several other psychological approaches to entrepreneurship have been suggested. Hisrich(1990) identifies several characteristics of entrepreneurs in terms of (a) conditions that make entrepreneurship desirable and possible,(b) the childhood family background, (c) the education level, personal values and motivations and (d) role modeling effects and other support systems. Bird(1989) has also examined entrepreneurial behaviour by focusing on work and the family background, personal values and motivations.

Contemporary Focus

The two most common approaches used in researching the characteristics of entrepreneurs have been the trait approach and the demographic approach (Robinson et al.,1991). In the trait approach, the entrepreneur is assumed to be a particular personality type whose characteristics are key to explaining entrepreneurship as a phenomenon (Gartner,1988;1989). Following McClelland(1961,1987), many other researchers have explored areas such as achievement motive, locus of control, risk taking, innovation etc.

In demographic approach, demographic information is used to arrive at a profile of a typical entrepreneur assuming that people with similar background posses similar underlying stable characteristics. The approach presumes that by identifying demographic characteristics of known entrepreneurs it will be possible to predict entrepreneurship in unknown populations (Robinson et al.,1991). The demographic variables found most examined are family background, birth order, role model, marital status, age, education level of parents and self, socio-economic status, previous work experience and work habits.

First, the approach assumes that human behaviour is strongly influenced by demographic characteristics such as sex, race, or birth order.


Second, the practice of using demographic characteristics as surrogates for personality characteristics is not appropriate. There is also a lack of adequate empirical evidence in this regard.


Third, the approach does not help predict who will or will not be an entrepreneur on the basis of knowledge of one’s birth order, level of education or parental heritage. Besides, demographic characteristics being static in nature cannot explain a dynamic multifaceted phenomenon like entrepreneurship.


Hannan and Freeman(1977) have used the population-ecology model (PEM), to analyze the concept of entrepreneurship. The PEM seeks to predict the probability of births and deaths within a population of firms within a given industry niche, conferring the environment rather than the person with the status of the key entity in determining organizational survival. Recent research following this approach are focused on the presence, characteristics and change in a population or organization in an ecological context provided by the host society (Reynolds, 1991). Deficiencies of this model have been pointed out by Bygrave and Hoffer(1991). These models, while making statistical predictions at the population level, fail to predict the fate of specific firms.


Entrepreneurship: An Integrative Behavioural Framework

The key elements identified are Personal Resourcefulness, Achievement Orientation, Strategic Vision, Opportunity Seeking and Innovativeness.


Personal Resourcefulness

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 ‘proactiveness’.


‘Personal resourcefulness’ in the belief in one’s own capability for initiating actions directed towards creation and growth of enterprises. Such initiating process requires cognitively mediated self regulations of internal feelings and emotions, thoughts and actions as suggested by Kanungo and Misra(1992).


Achievement-Orientation

While personal initiative and purposeful behaviour can be view as a good starting point of an entrepreneurial effort, many such initiatives fail. The archetype successful entrepreneur is supposed to epitomize achievement motivation (McClelland,1961) which facilitates the creation and development of enterprises in competitive environments. While critics have raised serious questions regarding the unique or overarching significance of n-Ach in the emergence of entrepreneurship (Smelser,1976), this element of personality has continued in the mainstream of entrepreneurship theory (Shaver & Scott,1991). People with high n-Ach are known to seek and assume high degree of personal responsibility, set challenging but realistic goals, work with concrete feedback, research their environment and choose partners with expertise in their work (Kanungo & Bhatnagar, 1978). Such characteristics of high n-Ach people contribute to successful completion of tasks that they venture to take up. Hence, we see achievement orientation as a set of cognitive and behavioural tendencies that are oriented towards ensuring that outcomes such as enterprise creation, survival and growth are realized.


Opportunity-Seeking

The context in which an individual brings to bear his/her initiative, achievement orientation and visioning have a strong bearing on what it produces; when these forces are directed towards realizing surplus or value in a market environment, over a period of time, we see the creation of enterprises. This perspective of the entrepreneur as a merchant adventurer, who in Cantillon’s view balances out imperfections in the market (Gopakumar,1995) in pursuit of what Bentham terms wealth, provided the historical basis for the development of entrepreneurship. The wealth is seen as the reward the entrepreneurial individual gains for the risk taken or exercise of judgment where there is greater possibility for error; this distinguishes between certain return from wage labour, and return from risk-oriented production for the market. Hence ‘opportunity seeking’ would include one’s ability to see situations in terms of unmet needs, identifying markets or gaps for which product concepts are to be evolved, and the search for creating and maintaining a competitive advantage to derive benefits on a sustained basis.


Innovativeness

Schumpeter(1949) went on to conceptualize entrepreneurs as persons who are not necessarily capitalists or those having command over resources, but as ones who create new combinations of the factors of production and the market to derive profit. Innovativeness refers to creation of new products, markets, product-market combinations, methods of production and organization, and the like that enable the enterprise to gain competitive advantage in the market.


It is evident that each of the dispositions referred to may be found in all types of individuals (entrepreneurs and non- entrepreneurs). Then how can we relate these dispositions to entrepreneurship? We propose that when these five elements converge at high intensities, in non-restrictive environments, it is likely to give rise to enterprise formation. Therefore, one may find individuals who had created enterprises in the past now turning weak because they may no longer be proactive enterprise creators; instead they may be content to play the role of managers in their stable business, or turn to community leadership, and the like. Hence, this perspective lends to a process view of entrepreneurship.

6 comments:

Peter Varma said...

Excellent layout, valuable information.
Rgds,
Pankaj
http://petervarma.blogspot.com
+91 9810000163

mr said...
This comment has been removed by the author.
mr said...

THE infomations really help'd me in understanding abt the topic of enterpreneurship development.keep it up...!!!!

lekshmi said...

excellent article, very much important information.

lekshmi said...

excellent article, very much important information.

Anonymous said...

very inspiring article it will be nice if I can get a full copy