Benefits and Limitations of Economic Analyses of Entrepreneurial Behaviour - Essay Example

Critically Evaluate and Explain the Benefits and Limitations of Economic Analyses of Entrepreneurial Behaviour Table of Contents Introduction 2 Entrepreneurial Behaviour 2 Benefits of Economic Analyses for Entrepreneurial Behaviour 3 Entrepreneur Behaviour in Economic Environment 5 Technological Context of Entrepreneurial Behaviour 5 Marketing Context of Entrepreneurial Behaviour 6 Political Context of Entrepreneurial Behaviour 6 Limitations of Economic Analyses for Entrepreneurial Behaviour 7 Conclusion 10 References 11 Bibliography 14 Introduction Entrepreneurship is a process of static growth of a thought which can lead to profit. An entrepreneur initiates innovation in order to increase the market potential which is significant for economic development. The most important characteristics of entrepreneurs are finding prospects and taking risks to gain benefits from them. Entrepreneurship consists in undertaking those activities which are generally not conducted in usual business routine. However, the entrepreneurial behaviour in any country can be affected by economic analyses of a particular nation. The efficacy of entrepreneur improves if certain economic contexts such as political or governmental interference are less in a country. Entrepreneurial Behaviour Several economists have defined the term ‘entrepreneur’ and their behaviour in economy. In economic theories the knowledge of selection and decision making is essential for successful entrepreneurs. Entrepreneurs demonstrate individual qualities which let certain persons to make innovative decisions whose impact can be experienced in the long run. In every country, the entrepreneurial behaviour is influenced by the suitability and setup of proper business foundations. For instance, political environment, economic environment, marketing aspects and technological aspects can significantly impact on the behaviour of entrepreneurs. A stable, expectable and well-organised business environment with strong governing system generally facilitates entrepreneurs to take innovative decisions. Entrepreneurs positively react to the environmental opportunities which in turn is related with economic analysis, because it can help to measure the benefits of opportunities identified (Welter & Smallbone, 2011). Benefits of Economic Analyses for Entrepreneurial Behaviour One of the most significant tasks of entrepreneurs is to discover and take advantage of opportunities. Opportunities of entrepreneurs can be defined by those environmental circumstances where products and services can be traded for higher rate than cost of production. Entrepreneurs typically decide when to utilise a market in order to support the discovery, and when to create a business to assist in facilitating the discovery. These decisions typically depend on the economic analyses of a country such as technological environment, marketing environment and political environment (Hsieh & et. al., 2007). Before an entrepreneur earns revenue from an opportunity, he/she first analyse the worth of the opportunity. According to the discovery theory, there are two major assumptions which impact on entrepreneurial behaviour. This theory was highlighted by several authors which depicts that opportunities appear from competitive imperfections in the economy because of changes in technology, customers’ demand and other aspects which impact the industry or market. Opportunities arise independent of entrepreneurial activities until discovery by remarkably cautious individuals who can take advantage of them. In discovery theory, the task of an entrepreneur is to stay alert to the presence of opportunities and to entitle those for accomplishing utmost profit potential (Alvarez & Barney, n.d.). The economic analyses are significant for entrepreneurs in order to judge the worth of opportunities. According to Schumpeter, information is vital factor for analysing the economic impact of opportunities discovered by entrepreneurs. Any changes in technology, political environment, cultural fashions, economic aspects, marketing principles and governments’ rules can generate new information which can be useful for entrepreneurs to recombine capitals into more valuable arrangements. By shifting the balance of price, fluctuations in economy let entrepreneurs with access to new information to obtain funds at less cost and sell the output with anticipation for making higher profit. On the other hand, according to Kirznerian, opportunities occur largely because of mistakes made by previous decision developers which in turn generate surpluses or deficiencies. The mistakes can happen in any place which makes it challenging for people to recognise the basis of opportunities (Shane, 2003). It is useful for entrepreneurs to analyse if certain forms of opportunities are more valuable compared to others. There are several economic analyses methods such as cost-benefit analysis, cost efficiency analysis, risk analysis, utility analysis, return on investment analysis, and cost minimisation analysis which help to know if different types of prospects impact different parts of value chain in better or smaller productivity. Economic analyses are valuable because there is need to understand and examine the economic condition under which the business operates. Only economic analyses can disclose the cost which contains all information in the economy. Economic analyses helps to provide necessary information which is required for entrepreneurs to assign the resources in order gain higher profit. Entrepreneurs take decision by analysing the equilibrium of supply and demand of any product, because if equilibrium point is achieved then people will have no reason to change their approach to purchase of products or services (Shane, 2003). Entrepreneur Behaviour in Economic Environment Comprehensive variations in economic background can significantly influence the entrepreneurial behaviour. According to Simon Down (2010), an actual international economy can be formed though global expansion of new technologies, rather than expansion of new market. Every economy is bound to convert itself by replicating new technologies which are invented by entrepreneurs. He also suggested that there is no nation which can separate itself from the trend of innovative destruction brought by entrepreneurs (Down, 2010). Technological Context of Entrepreneurial Behaviour Simon Down in his book “Enterprise, Entrepreneurship and Small Business” depicted that supply and demand forces of an economy help organisations to adjust rapidly with the market demand as well as supply of money. Presently, the technological development through rapid utilisation of computer and internet makes it easy to harmonise the communication as well as simplify the level of monetary transaction throughout the world. As a consequence of these technological changes, new entrepreneurial societies have appeared where shareholders have started to restate the demand for interim returns on investment. Improved technology in any country can simply increase the opportunity for growth and expansion which in turn can impact on the entrepreneurial behaviour. For this reason, developed and developing countries attempt to increase the level of entrepreneurship because entrepreneurship can bring innovation and innovation helps to accelerate the technology oriented economic progress (Down, 2010). Marketing Context of Entrepreneurial Behaviour Marketing context including international subsidiary directives and mechanisms are significant elements of entrepreneurship. In present days’ fast changing market, organisations need to be innovative in order to maintain their position and competitive edge. Organisations face substantial stress to swiftly and effectively react with the market demand, at the same time accomplishing global competency. This has led entrepreneurs to identify the requirement to influence innovation which arises within their businesses to satisfy the market demand. Contemporary businesses vary in terms of the opportunities from their operations, objectives, strategic positions and organisational cultures which can upsurge entrepreneurs’ innovativeness and enthusiasm to take risks and also increase the capability to involve in entrepreneurial actions (Academy of Management, n.d.). The business environmental drives and densities, political conditions, economic necessities, legal objects and socio cultural impacts essentially place unique stress on entrepreneurs to be reactive to the opportunities which exist in their immediate situation. Michael Porter depicted that demand condition and competitive domestic environment result in more entrepreneurial activities such as introducing strategic regeneration, expansion of new products and processes, or starting new projects to participate in the dynamic marketplace (Academy of Management, n.d.). Political Context of Entrepreneurial Behaviour The political environment in any country comprises the regulations, political structure, governmental system and activities and lobbying units which inspire or hamper individuals for conducting entrepreneurial activities. The political environment with its principles, philosophies, structure, legislations and rules significantly impact organisations where it operates the businesses. The political background where a society lies with certain principles might not support the choices and circumstances which are essential to generate entrepreneurial culture or activities. In general, the understanding of political contexts and values allows entrepreneurs to recognise how regulations, political structure, governmental actions, and social principles affect the behaviour of business enterprises. For instance, an entrepreneur of the United Kingdom might fail to conduct business in South Africa due to different political structure or diverse social culture; similarly he/she might succeed in certain other nations due to favourable political culture which matches with his/her business requirements with the market demands (Ogbor, 2009). Entrepreneurial behaviour in a country is directly related with political volatility and economic recession. The uncertainty or turbulence headed by election in any country can significantly extinguish business enterprises and transfer the investment money to that nation where political condition is quite stable. Growing market opportunities, higher production, human resource improvement, product and process innovation, and superior customer demand are key aspects of entrepreneurial activities. These key aspects are generally not present in an environment which is politically unstable, insecure and full with numerous types of risks (Shane, 2000). Limitations of Economic Analyses for Entrepreneurial Behaviour The economic analyses have several limitations on the behaviour of entrepreneurs. Analysing the benefits of opportunities in any market through economic analyses is quite difficult compared to measuring the costs of opportunities. Cost in any business can occur in the form of money, asset, surplus, market share, and therefore is subject to economic measurement. However, benefits can be non-economic in nature and economic analyses are unable to convert those benefits in monetary terms (United Nations Environment Programme, n.d.). Economic analyses are often blind in aspects such as environmental fairness and are unable to make clear measurements about the cost of supervisory decisions and persons who might take the advantages of opportunities discovered by entrepreneur. Economic analyses cannot present information which can be used to offer a stronger base for assessing any inequitable allocation of resources. Economic analyses generally do not address the implication of government policies which can impact on the business (Tec-Com Inc., 1996). The outcomes of economic analyses such as consequences of risk calculations are frequently conveyed as figures, unaided by any information on the accuracy or uncertainty which might be linked with risks. The economic analysis is inappropriate for measuring certain entrepreneurial activities. For instance, information about starting any business in terms of economic analyses can only calculate the net entrance budget of an organisation, but other factors such as fluctuations of market or entrepreneurial activities within same industry are excluded from economic analyses (United Nations Conference on Trade and Development, 2004). The other limitation of economic analyses is regarding taking appropriate decisions about price. An entrepreneur must make decisions about the utilisation of resources to develop new product or process, and price of product plays a vital part in taking those decisions. However, an entrepreneur cannot determine the price of new product through just economic analyses because it cannot exist before entrepreneur invents it. Furthermore, economic analyses are unable to reveal the price level at which customers will be satisfied (Shane, 2003). Conclusion Entrepreneurship is a complex occurrence which involves not only the economic aspects but also other aspects such as political or technological. Entrepreneurship can behave in different manners in diverse economic conditions by examining the opportunities through economic analyses. Entrepreneurs seek to operate in free economy with fair competition and economic analyses help to evaluate the demand as well as profitability of a business. Economic analyses can significantly impact on the behaviour of entrepreneurs to carry out certain innovative activities where profit potential is high. In spite of certain limitations of economic analyses on entrepreneurship behaviour, these are vital tools for any entrepreneur to understand the market or growth prospects of business. References Alvarez, S. & Barney, J. B., No Date. Toward a Creation Theory of Entrepreneurial Opportunity Formation. The Ohio State University. [Online] Available at: http://www.yefafrica.org/file/yef_resources/toward_a_creation_theory_of_entrepreneurial_opportunity_formation.pdf [Accessed February 11, 2012]. Academy of Management, No Date. Entrepreneurship in Multinational Subsidiaries: The Effects of Corporate and Local Environmental Contexts. Pace University. [Online] Available at: http://www.aom.pace.edu/amj/images/samples/HypotheticalMacroSubmission.pdf [Accessed February 11, 2012]. Down, S., 2010. Enterprise, Entrepreneurship and Small Business. 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