Entrepreneurship and Venture Creation - Essay Example

Entrepreneurship and Venture Creation The exponential rise in venture creation has resulted in entrepreneurship research. Presently, entrepreneurs have played a detrimental role in the economy resulting in the need to understand what unique traits, skills or motivations result in the creation of an entrepreneur. The term entrepreneur denotes an individual who starts a business and bears the risks associated with that business. The most observable and unique trait present in an entrepreneur is the willingness to bear risks. In spite of much research in the entrepreneurship field, scholars have not agreed on the exact definition of the term. Over the years, scholars have developed theories to explain the concept of entrepreneurship to understand what factors contribute to the prevalence of entrepreneurship in a particular society. Theories such as the economist theory or the sociologist theory seek to explain this unique phenomenon, for example, to the economist; entrepreneurship is linked to market conditions (Baron 2012:6). There are several theories that explain the multidimensional concept of entrepreneurship. For example, the psychological theories that focuses on the mental and emotional factors characteristic of entrepreneurs. In the classical and neo-classical period, the terms entrepreneurship and entrepreneur were perceived to be similar (Evans 2014:48). The theories explaining entrepreneurship can be divided into three broad categories that are the psychological aspects, sociological theories and economic principles. However, scholars in the discipline of economics are the main contributors to the development of the entrepreneurship concept. In the neo-classical theories, entrepreneurship does not exploit the business field. Based on the earlier concepts of market equilibrium, neo-classical theories argue that firms in the market obtain their profit margin based on their levels of labor (Evans 2014:48). The neo-classical theories also argue that entrepreneurs who put in more effort compared to their counterparts in turn obtain more profits (Evans 2014:48). The key limitation in the neo-classical theories is that they undermined the role of management and decision making in the success of the firm in the market. The theories also focused on the knowledge of the entrepreneurs and the nature of the business that an entrepreneur carries out. For example, if an entrepreneur is more knowledgeable in a particular type of business compared to their counterpart, then the entrepreneur is likely to be successful (Evans 2014:48). Economic theories on entrepreneurship base their arguments on the market equilibrium and economic concepts such as division of labor. Authors such as Cantillon (1755), Hayek (1937) and Schumpeter (1934) are some of the contributors to the development of the economic theory (Acs & Audretsch 251). The economist theories view the entrepreneur as an individual separate from the firm. Therefore, an analysis of entrepreneurship seeks to explain the role of the entrepreneur within the firm (Acs & Audretsch 251). The entrepreneur does not possess knowledge concerning the market environment and does not utilize factual information to aid in decision-making (Acs & Audretsch 251). According to the economist theory, judgment is purely intuitive, and the entrepreneur makes decisions based on previous experiences and expertise in coordination of scarce resources (Acs & Audretsch 251). Also, proponents of the economist theory argue that information is always scarce, and, therefore, decisions in the firm vary depending on the situation (Acs & Audretsch 252). One of the economic theories on entrepreneurship includes Leibenstein X-efficiency theory. The theory argues that the degree of inefficiency in a firm’s utilization of resources determines the degree to which the firm achieves its potential (Frantz 2013:25). The theory also states that that the act of an individual, particularly managerial and decision making plays a detrimental role in the success of the business (Frantz 2013:26). Therefore, according to this theory, the role of an entrepreneur is to ensure the profitability of the firm by knowing the prices of inputs and outputs that are marketed. Leibesten argued that an entrepreneur should ensure that the actual cost of production of the products exceeds the minimum cost of production to realize profits (Frantz 2013:27). Similar to Leibenstein, Hayek’s market process theory explains the entrepreneurship concept based on the economic system. The theory argues that the activities of the entrepreneur disrupt the market equilibrium (Boettke & Coyne 2015:48). The entrepreneur uses their intuition, experience, and skills to make decisions that will ensure their success. Resultantly, the rivalry between entrepreneurs in the market creates competition (Acs & Audresch 2010:222). Based on the Hayekian perspective, producers have knowledge of what to produce, the mechanisms to utilize in the production process and the end consumers. Hayek also argues that the functioning of the market equilibrium is based on “spontaneous order” that is as a result of human action and not as a result of human behavior (Acs & Audresch 2010:222). Therefore, if banks increase the amount of loan supplied or a reduction in the market interest rate, then the entrepreneur becomes motivated to invest more. However, if there is a shift in the market equilibrium and the interest rate rises, them the entrepreneur will be unable to expand his/her business and in turn economic development will be restricted (Boettke & Coyne 2015:45). The early economists’ theories presented by scholars such as Leibenstein and Hayek failed to recognize the role of the entrepreneur in ensuring the success of the firm. Resultantly, the French economist, Richard Cantillon set the economist theory on entrepreneurship in a new direction. According to Cantillon, there were two classes of people, the undertakers and the employed (Salvadori et al. 2013:105). The undertaker was different from the hired individual as the undertaker was willing to take risks to earn their income. For example, a farmer is an entrepreneur as he/she faces the uncertainties of weather and has to pay taxes for the land. The farmer bears the uninsurable risks of not knowing whether he/she will reap the harvest of his/her efforts (Salvadori et al. 2013:105). Cantillon also successfully linked the entrepreneurial role in risk-taking to market economies arguing that the prices in the market determine whether the consumers will purchase the products or not (Salvadori 2013:105). Knight’s economist theory focuses on the uncertainties of the market. The risk of un-certainty theory by Knight was developed after Hawley’s theory that profits are the rewards of the risk-taking entrepreneur (Salvadori et al. 2013:108). According to Knight, the entrepreneur faces the risk of uncertainty as he/she is unable to determine how the product will be accepted by the consumer in the market. The risks of uncertainty vary, for example, changes in demographics. Knight developed his uncertainty risk theory based on Hawley’s risk bearing theory (Salvadori et al 2013:108). According to the Knight, the entrepreneur should be ready to bear all the outcomes resulting from the provision of capital to a new venture. It is the element of uncertainty and the provision of capital that makes an individual entrepreneurial (Salvadori et al. 2013:108). The previous economist theories fail to identify the entrepreneur’s innovative role in the market. Resultantly, Schumpeter’s innovative theory argues that innovation is detrimental in ensuring that the ideas of the entrepreneur evolve to become a successful venture (Boettke & Coyne 2015:72). Innovation refers to the creation of a new idea, product or a new approach to carrying out an activity. According to Schumpeter, to realize success, an entrepreneur needs to create obstacles in the market equilibrium and transform the economy to a new level (Boettke & Coyne 2015:72). The obstacles can involve the adoption of a new method of production, the creation of new products or the identification of new market sources. Schumpeter provided various definitions of entrepreneurship, for example, entrepreneurship encompasses leadership as the individual is expected to undertake various tasks (Boettke & Coyne 2015:72). Also, the entrepreneur acts a bridge between the societies as a whole as they strive to take advantage of economic endowments to satisfy the needs of the public (Boettke & Coyne 2015:73). Resultantly, according to Schumpeter, an entrepreneur is an innovator who uses his/her innovation in economic activities to ensure the development of the economy to a new level in the equilibrium. Whereas the economic theories base their arguments on the market forces, the sociological theories centre their argument on the social contexts that facilitate entrepreneurship. For example, Max Weber’s theory of religious beliefs argues that religious beliefs and play an important role in the development of entrepreneurial culture (Praszkier & Nowak 2011:15). According to Weber, religious beliefs in the society shape the entrepreneurial culture. For example, the spirit of capitalism that is prevalent in economic-centred societies glorifies economic freedom and the formation of private enterprises (Praszikier & Nowak 2011:15). There is also the theory of social change by Hagen that argues that the technological changes in the traditional society facilitate the development of the entrepreneur in the society. Hagen rejected the follower’s syndrome that proposed the imitation of western technologies to promote entrepreneurial cultures (Praszkier & Nowak 2011:36). Contrarily, in the psychological theory, the entrepreneur is identified as an individual with certain psychological characteristics, for example, ambition and vision for success or resilience in the face of opposition (Corbett & Katz 2012:19). The psychological theory that was developed David McCLelland identifies psychological characteristics of the entrepreneur such as the need for success in the business field. The first psychological theory approach focuses on personal resourcefulness. For example, an entrepreneur is fully aware of the risk being undertaken and possesses cognitively mediated behavior, thoughts, and actions (Corbett & Katz 2012:20). In spite of the differences regarding definition, character and role of an entrepreneur, the theories provide evidence that an entrepreneur is a unique individual who is willing to undertake risks and engages all their energy to achieve their goals. Presently, there are various sub-categories of entrepreneurship such as the social entrepreneur. Social entrepreneurs identify underutilized resources, for example, buildings and equipment and utilize their business expertise to satisfy unmet social needs. Social entrepreneurs tend to operate in the traditional public sector, voluntary sector or in large public sector corporations (Wetherly & Otter 2014:397). In the UK, the number of social entrepreneurs is average and the gender gap is considerably low compared to commercial entrepreneurs. Mandy Young, the owner of Adrenaline Alley in Northamptonshire is an example of a social entrepreneur. According to Young, the idea to start the ramp park originated from a personal life experience that involved her son. Ever since he was two years old, Mandy’s son, John, had struggled with an undiagnosed brain tumor (Adrenalide Alley 2015). At the age of 13 years, John was finally out of the hospital and was beginning his new life by breaking down the social barriers. However, one night, John was attacked by a group of friends who attacked him in spite of their knowledge of his condition. John ended up resuming his isolated life of skateboarding in the garden at home. Mandy realized the youths in the region needed a place where they could socialize and build their confidence hence the creation of the Adrenaline Alley (Adrenalide Alley 2015). The Alley is an indoor ramp park and performance centre that aims to provide a safe and secure environment for the young people in Northamptonshire. As a social entrepreneur, Mandy carried out a number of steps before the establishment of the indoor park. First, Mandy consulted her son and his friends in a public meeting. After two consecutive meetings, Mandy identified that the youths in the region had a need for a place where they could practice their skating and ride their bicycles. Mandy identified that an indoor park was the ideal solution that would meet the demands of the youth and she carried out research concerning the culture of urban sports and its benefits as a sustainable venture. Mandy had to contact key stakeholders in the urban sports industry for funding. Also, she had to interact with the potential users of the facility to identify their needs (Gunn & Durkin 2010:116). The lack of a recreational facility for the youths in the region created a conflict amongst the youths, particularly the BMX riders and the local skaters. The skaters had to travel far to enjoy their sport and in most cases endured the dangers of riding in the streets which in turn resulted in conflicts with the police (Gunn & Durkin 2010:116). As a social entrepreneur, Mandy presents unique characteristics that are different from a traditional entrepreneur. Whereas the traditional entrepreneur seeks to make profits, the social entrepreneur aims at realizing societal change. Social entrepreneurship entails philanthropy and social relationship (Vasakarla2008:32). A social entrepreneur identifies the problems in the society, conducts research on the root causes and seeks to solve the problem at hand. In the Adrenalide case, Mandy identified the lack of a recreational site for the youths as a problem that contributed to tension between the youth, local authorities and the public. The youths in Corby town in Northamptonshire engaged in violence that is between the BMX riders and the skaters in an attempt to control the limited recreation space. The skaters had to engage in sports on the road resulting in issues with the authorities and the public. Corby town is a deprived town that is undergoing regeneration since its identification by the authorities as one of the most deprived towns in the UK (Gunn & Durkin 2010:115). Social entrepreneurs advocate for societal change. In the case of the Adrenalide alley, Mandy became a strong advocate for change and rallied up the public and other key stakeholders in an attempt to impart a change in the society. Mandy’s frustration came from her experience as a parent which enabled her to identify the challenge that the youths face in Corby town. Resultantly, it is her personal frustration that motivated her to advocate for change. In the U.S. the willingness to take the risk of advocating for change for the wellbeing of others is deemed heroic (Levie & Hart 2011:202). Contrarily in the UK, scholars have adopted a less heroic approach and identify social entrepreneurs as individuals who have always existed within the society and are motivated to change the world for the better (Levie & Hart 2011:203). When it comes to demographics, researchers observe that there is no apparent trend in social entrepreneurship. Whereas commercial entrepreneurship is a male dominated field, social entrepreneurs tend to be average people from various educational backgrounds from doctorate levels to individuals with no education (Tokarski & Ernst 2012:52). When it comes to personality, social entrepreneurs are special individuals with a unique character that is often defined differently based on the author. For example, Bornstein 2004, described social entrepreneurs as individuals who are relentless in the pursuit of their visions (Tokarski & Ernst 2012:52). Crutchfield and McLeoid 2008 described social entrepreneurs as individuals who relentlessly pursue new opportunities, are courageous and pursue societal change without being constrained by current resources (Tokarski & Ernst 2012:53). Social entrepreneurs are perceived to be a subspecies of the corporate entrepreneur (Tokarski & Ernst 2012:56). This is because social entrepreneurs possess certain personality traits that are similar to the business entrepreneur. For example, social entrepreneurs draw their inspiration from an unsatisfying equilibrium, innovatively develop a solution, take action, and have the courage to take action and the resilience to continue (Tokarski & Ernst 2012:56). Also, similar to corporate entrepreneurs, social entrepreneurs are ambitious, risk-tolerant, and able to communicate and to obtain resources. Social entrepreneurs’ poses unique characteristics. First, there are recurrent traits identifiable in a majority of social entrepreneurs, such as tolerance, need for autonomy, innovation, risk-taking and propensity (Tokarski & Ernst 2012:56). The GEM UK report indicates that social entrepreneurs are high-risk takers who will not allow fear to halt their ambitions. However, their risk-taking is relatively lower than that of commercial entrepreneurs (Tokarski & Ernst 2012:57). Social entrepreneurs are innovative. For example, Mandy in the case study exhibits innovation as she was able to identify the need for a recreational site as the solution to the youth tensions in the society. Mandy also exhibits the need for achievement which is another key characteristic of social entrepreneurs. Scholars observe that social entrepreneurs exhibit the need for independence similar to business entrepreneurs and that they are proactive (Tokarski & Ernst 2012:58). Social entrepreneurs portray a sense of social responsibility. Contrary to business entrepreneurs, social entrepreneurs have a pro-social personality that compels them to act for the benefit of the society (Tokarski & Ernst 2012:59). Social entrepreneurs show sympathy for members of the society, have consideration for others, go out of their way to help the members of the society and are genuinely ethical (Vasakarla2008:39). In our case study, Mandy shows genuine concern for the welfare of the youths and goes out of her way to collect funds for the indoor park. So, she adopts an entrepreneurship model in which she applies business expertise to ensure more efficiency in providing and delivering social services (Gunn & Durkin 2010:117). Intrapreneurship provides a different approach to entrepreneurship. The term refers to the employee(s) efforts to develop a new venture is an existing organization (Capstone 2013:245). In is contrary to entrepreneurship which aims at creating a new venture outside of the organisation. Intrapreneurship focuses on the activities of the employees and can be realised through several factors such as supporting the creation of internal ventures, supporting innovation within the firm and redefining strategies and capabilities (Capstone 2013:246). There is numerous researches citing the value of intrapreneurship, for example, this approach provides a company with new ideas that can be utilised to increase profits. When firms construct an environment that promotes risk-taking and innovation, the employees become motivated to explore their ideas and to ensure their success in the company (Capstone 2013:246). The term intrapreneurship is incorporated within the much broader term of corporate venturing. The latter, refers to a formal, direct relationship between two firms, in which the two share risks and resources for the purpose of mutual growth (Capstone 2013:246). This relationship includes intrapreneural ventures where a company involves small or independent ventures for the purpose of creating new technologies for the purpose of increasing sales. Intrapreneurship exhibits unique characteristics that are different from social entrepreneurship. First, intrapreneurs are risk takers. Similar to social entrepreneurs, Intrapreneurs identify an opportunity and ambitious, results-oriented, competitive and rational (Burns 2010:489). Unlike the entrepreneur who works alone, the intrapreneur identifies the need for a team and can comfortably work with others. Also, unlike entrepreneurs, intrapreneurs are motivated by corporate reward and recognition (Burns 2010:490). Intrapreneurship has its benefits. For example, the intrapreneur can depend on the reputation of the corporate venture to realize profits (Capstone 2013:246). Also, intrapreneurs can access capital at a faster rate than entrepreneurs. Intrapreneurs are identified as leaders as they often have the ability to manage a team in an organization to realize their objective. The key element of an intrepreneur is that they opt to seek their venture creation while still working in the company. Contrary to intrapreneurs, lifestyle entrepreneurs seek freedom from employment. The term lifestyle entrepreneur was coined by William Wetzel in 1987 and refers to entrepreneurs who seek independence regarding employment or income. Lifestyle entrepreneurs engage in venture creation to create their own living (Karlsson 2014:144). The businesses created by this category of entrepreneurs pursue a particular lifestyle while ensuring the individual to earns a decent wage. The motivation behind the venture creation is what distinguishes lifestyle entrepreneurs from the traditional entrepreneur in that the lifestyle entrepreneur pursues venture creation to seek autonomy while earning an income that is comparable or more than their wage when they were employed (Karlsson 2014:144). In spite of the differences in terms of the type of venture created and the motivations behind the venture, entrepreneurs are unique individuals who possess the willingness to take risks to satisfy their ambitions for success. References Acs, Z.J. & Audresch, D.B. (2010) Handbook of entrepreneurship research: an interdisciplinary survey and introduction, Springer science & business media, U.S. Adrenalide, A. (2015) Our story, Northampronshire, 1 December 2015 from . Baron, R.N. (2014) Essentials of entrepreneurship: evidence and practice, Edward Elgar Publishing, U.S. Boettke, P.J. & Coyne, C.J. (2015) The Oxford handbook of Austrian economics, Oxford University Press, UK. Burns, P. (2010) Entrepreneurship and small business, Palgrave Macmillan, UK. Capstone (2013) The capstone encyclopaedia of business: the most up-to-date and accessible guide to business ever, John Wiley & Sons, UK. Corbett A.C. & Katz, J.A. (2012) Entrepreneurial action, Emerald Group Publishing, UK. Evans, A.J. (2014) Markets for managers: a managerial economics primer, John Wiley & Sons, UK. Frantz, R.S. (2013) X-efficiency: theory, evidence and applications (Vol. 2), Springer Science & Business Media, US. Gunn, R. & Durkin, C. (2010) Social entrepreneurship, Policy Press, UK. Karlsson, C., Johansson, B. & Stough, R.R. (Eds.). (2014) Agglomeration, clusters and entrepreneurship: studies in regional economic development, Edward Elgar Publishing, UK. LevieJohnathan, H.M. (2011) "Business and social entrepreneurs in the UK: gender, context and commitment", International Journal of Gender and Entrepreneurship, Vol. 3, no. 3 pp. 200 – 217, Emerald, UK. Praszkier, R. & Nowak, A. (2011) Social entrepreneurship: theory and practice, Cambridge University Press, UK. Salvadori, N., Gehrke, C., Steedman, I. & Sturn, R. (Eds.). (2013) Classical political economy and modern theory: essays in honour of Heinz Kurz (Vol. 137), Routledge, U.S. Tokarski, K.O. & Ernst, K. (2012) Social entrepreneurship and social business, Springer-Gabler, UK. Vasakarla, V. (2008) A Study on Social Entrepreneurship and the Characteristics of Social Entrepreneurs, ICFAI Journal of Management Research, 7, 4, pp. 32-40, Business Source Complete, EBSCOhost, viewed 1 December 2015. Wetherly, P. & Otter, D. (2014) The business environment: themes and issues in a globalising world, Oxford University Press, UK. Read More