Entrepreneurship

Historical usage

Entrepreneur (/ˌɒntrəprəˈnɜːr/), is a loanword from French. First used in 1723, today the term entrepreneur implies qualities of leadership, initiative, and innovation in new venture design. Economist Robert Reich has called team-building, leadership, and management ability essential qualities for the entrepreneur. Historically the study of entrepreneurship reaches back to the work in the late 17th and early 18th centuries of Richard Cantillon and Adam Smith, which was foundational to classical economics.

Joseph Schumpeter

In the 20th century, entrepreneurship was studied by Joseph Schumpeter in the 1930s and other Austrian economists such as Carl Menger, Ludwig von Mises and Friedrich von Hayek. The term "entrepreneurship" was coined around the 1920s, while the loan from French of the word entrepreneur dates to the 1850s. According to Schumpeter, an entrepreneur is willing and able to convert a new idea or invention into a successful innovation. Entrepreneurship employs what Schumpeter called "the gale of creative destruction" to replace in whole or in part inferior offerings across markets and industries, simultaneously creating new products and new business models. Thus, creative destruction is largely responsible for long-term economic growth. The idea that entrepreneurship leads to economic growth is an interpretation of the residual in endogenous growth theory and as such continues to be debated in academic economics. An alternate description by Israel Kirzner suggests that the majority of innovations may be incremental improvements such as the replacement of paper with plastic in the construction of a drinking straw that require no special qualities.

For Schumpeter, entrepreneurship resulted in new industries and in new combinations of currently existing inputs. Schumpeter's initial example of this was the combination of a steam engine and then current wagon making technologies to produce the horseless carriage. In this case the innovation, the car, was transformational, but did not require the development of dramatic new technology. It did not immediately replace the horse-drawn carriage, but in time, incremental improvements reduced the cost and improved the technology, leading to the modern auto industry. Despite Schumpeter's early 20th-century contributions, traditional microeconomic theory did not formally consider the entrepreneur in its theoretical frameworks (instead assuming that resources would find each other through a price system). In this treatment, the entrepreneur was an implied but unspecified actor, consistent with the concept of the entrepreneur being the agent of x-efficiency.

For Schumpeter, the entrepreneur did not bear risk: the capitalist did. Schumpeter believed that the equilibrium ideal was imperfect Schumpeter (1934) demonstrated that changing environment continuously provides new information about the optimum allocation of resources to enhance profitability some individuals acquire the new information before others, recombine the resources to gain an entrepreneurial profit. Schumpeter was of the opinion that entrepreneurs shift the Production Possibility Curve to a higher level using innovations.

Initially, economists made the first attempt to study the entrepreneurship concept in depth Richard Cantillon (1680-1734) considered the entrepreneur to be a risk taker who deliberately allocates resources to exploit opportunities in order to maximize the financial return. Cantillon emphasized the willingness of the entrepreneur to assume risk and to deal with uncertainty. Thus, he draws attention to the function of the entrepreneur, and distinguishes clearly between the function of the entrepreneur and the owner who provides the money. Alfred Marshall viewed the entrepreneur as a multi-tasking capitalist. He observed that in the equilibrium of a completely competitive market, there was no spot for "entrepreneurs" as an economic activity creator.

Historical barriers

Dating back to the time of the medieval guilds in Germany, a craftsperson required special permission to operate as an entrepreneur was the small proof of competence (Kleiner Befähigungsnachweis), which restricted training of apprentices to craftspeople who held a Meister certificate. This institution was introduced in 1908 after a period of so-called freedom of trade (Gewerbefreiheit, introduced in 1871) in the German Reich. However, proof of competence was not required to start a business. In 1935 and in 1953, greater proof of competence was reintroduced (Großer Befähigungsnachweis Kuhlenbeck), which required craftspeople to obtain a Meister apprentice-training certificate before being permitted to set up a new business.

2000s

In the 2000s, "entrepreneurship" has been extended from its origins in for-profit businesses to include social entrepreneurship, in which business goals are sought alongside social, environmental or humanitarian goals, and even the concept of the political entrepreneur. Entrepreneurship within an existing firm or large organization has been referred to as intrapreneurship and may include corporate ventures where large entities "spin off" subsidiary organizations.

Entrepreneurs are leaders willing to take risk and exercise initiative, taking advantage of market opportunities by planning, organizing, and deploying resources, often by innovating to create new or improving existing products or services. In the 2000s, the term "entrepreneurship" has been extended to include a specific mindset (see also entrepreneurial mindset) resulting in entrepreneurial initiatives, e.g. in the form of social entrepreneurship, political entrepreneurship, or knowledge entrepreneurship.

According to Paul Reynolds, founder of the Global Entrepreneurship Monitor, "by the time they reach their retirement years, half of all working men in the United States probably have a period of self-employment of one or more years; one in four may have engaged in self-employment for six or more years. Participating in a new business creation is a common activity among U.S. workers over the course of their careers." In recent years, entrepreneurship has been claimed as a major driver of economic growth in both the United States and Western Europe.

Entrepreneurial activities differ substantially depending on the type of organization and creativity involved. Entrepreneurship ranges in scale from solo, part-time projects to large-scale undertakings that involve a team and which may create many jobs. Many "high value" entrepreneurial ventures seek venture capital or angel funding (seed money) in order to raise capital for building and expanding the business. Many organizations exist to support would-be entrepreneurs, including specialized government agencies, business incubators (which may be for-profit, non-profit, or operated by a college or university), science parks, and Non-governmental organizations, which include a range of organizations including not-for-profits, charities, foundations and business advocacy groups (e.g., Chambers of Commerce). Beginning in 2008, an annual "Global Entrepreneurship Week" event aimed at "exposing people to the benefits of entrepreneurship" and getting them to "participate in entrepreneurial-related activities" was launched.

Definition

The term entrepreneur is defined as an individual who organizes or operates a business or businesses. Credit for coining this term generally goes to the French economist Jean-Baptiste Say. However, the Irish-French economist Richard Cantillon defined the term first in his Essai sur la Nature du Commerce en Général, or Essay on the Nature of Trade in General, a book William Stanley Jevons considered the "cradle of political economy". Cantillon used the term differently; biographer Anthony Breer noted that Cantillon saw the entrepreneur as a risk-taker while Say considered the entrepreneur a "planner". Cantillon defined the term as a person who pays a certain price for a product and resells it at an uncertain price: "making decisions about obtaining and using the resources while consequently admitting the risk of enterprise." The word first appeared in the French dictionary entitled "Dictionnaire Universel de Commerce" compiled by Jacques des Bruslons and published in 1723.

Relationship between small business and entrepreneurship

The term "entrepreneur" is often conflated with the term "small business" or used interchangeably with this term. While most entrepreneurial ventures start out as a small business, not all small businesses are entrepreneurial in the strict sense of the term. Many small businesses are sole proprietor operations consisting solely of the owner, or they have a small number of employees, and many of these small businesses offer an existing product, process or service, and they do not aim at growth. In contrast, entrepreneurial ventures offer an innovative product, process or service, and the entrepreneur typically aims to scale up the company by adding employees, seeking international sales, and so on, a process which is financed by venture capital and angel investments. Successful entrepreneurs have the ability to lead a business in a positive direction by proper planning, to adapt to changing environments and understand their own strengths and weakness.

Ethnic entrepreneurship

The term ethnic entrepreneurship refers to self-employed, business owners who belong to racial or ethnic minority groups in the United States and Europe. A long tradition of academic research explores the experiences and strategies of ethnic entrepreneurs as they strive to integrate economically into mainstream US or European society. Classic cases include Jewish merchants and tradespeople in large U.S. cities in the 19th and early 20th centuries as well as Chinese and Japanese small business owners (restaurants, farmers, shop clerks) on the West Coast.

In the 2010s, ethnic entrepreneurship has been studied in the case of Cuban business owners in Miami, Indian motel owners of the U.S. and Chinese business owners in Chinatowns across the United States. While entrepreneurship offers these groups many opportunities for economic advancement, self-employment, and business ownership in the United States remain unevenly distributed along racial/ethnic lines. Despite numerous success stories of Asian entrepreneurs, a recent statistical analysis of U.S. census data shows that whites are more likely than Asians, African-Americans, and Latinos to be self-employed in high prestige, lucrative industries.

Institutional entrepreneur

The USA-born British economist Edith Penrose has highlighted the collective nature of entrepreneurship. She mentions that in modern organizations, human resources need to be combined in order to better capture and create business opportunities. The sociologist Paul DiMaggio (1988:14) has expanded this view to say that "new institutions arise when organized actors with sufficient resources [institutional entrepreneurs] see in them an opportunity to realize interests that they value highly". The notion has been widely applied.

Feminist entrepreneur

A feminist entrepreneur is an individual who applies feminist values and approaches through entrepreneurship, with the goal of improving the quality of life and wellbeing of girls and women. Many are doing so by creating ‘for women, by women’ enterprises.’ Feminist entrepreneurs are motivated to enter commercial markets by desire to create wealth and social change, based on the ethics of cooperation, equality, and mutual respect.

Entrepreneurial behaviours

The entrepreneur is commonly seen as an innovator — a designer of new ideas and business processes. Management skill and strong team building abilities are often perceived as essential leadership attributes for successful entrepreneurs. Political economist Robert Reich considers leadership, management ability, and team-building to be essential qualities of an entrepreneur.

Uncertainty Perception and Risk-taking

Theorists Frank Knight and Peter Drucker defined entrepreneurship in terms of risk-taking. The entrepreneur is willing to put his or her career and financial security on the line and take risks in the name of an idea, spending time as well as capital on an uncertain venture. However, entrepreneurs often do not believe that they have taken an enormous amount of risks, because they do not perceive the level of uncertainty to be as high as other people do. Knight classified three types of uncertainty:

Entrepreneurship is often associated with true uncertainty, particularly when it involves the creation of a novel good or service, for a market that did not previously exist, rather than when a venture creates an incremental improvement to an existing product or service. A 2014 study at ETH Zürich found that compared with typical managers, entrepreneurs showed higher decision-making efficiency, and a stronger activation in regions of frontopolar cortex (FPC) previously associated with explorative choice.

Strategies

Strategies that entrepreneurs may use include:

Designing individual/opportunity nexus

According to Shane and Venkataraman, entrepreneurship comprises both "enterprising individuals" and "entrepreneurial opportunities", and researchers should study the nature of the individuals who identify opportunities when others do not, the opportunities themselves and the nexus between individuals and opportunities. On the other hand, Reynolds et al. argue that individuals are motivated to engage in entrepreneurial endeavors driven mainly by necessity or opportunity, that is, individuals pursue entrepreneurship primarily owing to survival needs, or because, they identify business opportunities that satisfy their need for achievement. For example, higher economic inequality tends to increase entrepreneurship rates at the individual level. However, most of it is often based on necessity rather than opportunity.

Opportunity perception and biases

The ability of entrepreneurs to innovate relates to innate traits, including extroversion and a proclivity for risk-taking. According to Joseph Schumpeter, the capabilities of innovating, introducing new technologies, increasing efficiency and productivity, or generating new products or services, are characteristic qualities of entrepreneurs. Also, many scholars maintain that entrepreneurship is a matter of genes, and that it is not everyone who can be an entrepreneur. Some people may be able to use "an innate ability" or quasi-statistical sense to gauge public opinion and market demand for new products or services. Entrepreneurs tend to have the ability to see unmet market needs and underserved markets. While some entrepreneurs assume they can sense and figure out what others are thinking, the mass media plays a crucial role in shaping views and demand. Ramoglou argues that entrepreneurs are not that distinctive and that it is essentially poor conceptualizations of "non-entrepreneurs" that maintain laudatory portraits of "entrepreneurs" as exceptional innovators or leaders Entrepreneurs are often overconfident, exhibit illusion of control, when they are opening/expanding business or new products/services.

Styles

Differences in entrepreneurial organizations often partially reflect their founders' heterogenous identities. Fauchart and Gruber have classified entrepreneurs into three main types: Darwinians, Communitarians, and Missionaries. These types of entrepreneurs diverge in fundamental ways in their self-views, social motivations, and patterns of new firm creation.

Links to sea piracy

Research from 2014 found links between entrepreneurship and historical sea piracy. In this context, the claim is made for a non-moral approach to looking at the history of piracy as a source of inspiration for entrepreneurship education as well as for research in entrepreneurship and business model generation.

Psychological make-up

Stanford University economist Edward Lazear found in a 2005 study that variety in education and work experience was the most important trait that distinguished entrepreneurs from non-entrepreneurs A 2013 study by Uschi Backes-Gellner of the University of Zurich and Petra Moog of the University of Siegen in Germany found that a diverse social network was also important in distinguishing students that would go on to become entrepreneurs

Studies show that the psychological propensities for male and female entrepreneurs are more similar than different. Empirical studies suggest that female entrepreneurs possess strong negotiating skills and consensus-forming abilities. Asa Hansson, who looked at empirical evidence from Sweden, found that the probability of becoming self-employed decreases with age for women, but increases with age for men. She also found that marriage increased the probability of a person becoming an entrepreneur.

Jesper Sørensen wrote that significant influences on the decision to become an entrepreneur are workplacepeers and social composition. Sørensen discovered a correlation between working with former entrepreneurs and how often these individuals become entrepreneurs themselves, compared to those who did not work with entrepreneurs. Social composition can influence entrepreneurialism in peers by demonstrating the possibility for success, stimulating a "He can do it, why can't I?" attitude. As Sørensen stated, "When you meet others who have gone out on their own, it doesn't seem that crazy."

Entrepreneurs may also be driven to entrepreneurship by past experiences. If they have faced multiple work stoppages or have been unemployed in the past the probability of them becoming an entrepreneur increases Per Cattell's personality framework, both personality traits and attitudes are thoroughly investigated by psychologists. However, in case of entrepreneurship research, these notions are employed by academics too, but vaguely. According to Cattell, personality is a system that is related to the environment. He further adds that the system seeks explanation to the complex transactions conducted by both - traits and attitudes. This is because both of them bring about change and growth in a person. Personality is that which informs what an individual will do when faced with a given situation. A person's response is triggered by his/her personality and the situation that is faced.

Innovative entrepreneurs may be more likely to experience what psychologist Mihaly Csikszentmihalyi calls flow. "Flow" occurs when an individual forgets about the outside world due to being thoroughly engaged in a process or activity. Csikszentmihalyi suggested that breakthrough innovations tend to occur at the hands of individuals in that state. Other research has concluded that a strong internal motivation is a vital ingredient for breakthrough innovation. Flow can be compared to Maria Montessori's concept of normalization, a state that includes a child's capacity for joyful and lengthy periods of intense concentration. Csikszentmihalyi acknowledged that Montessori's prepared environment offers children opportunities to achieve flow. Thus quality and type of early education may influence entrepreneurial capability.

Research on high risk settings such as oil platforms, investment banking, medical surgery, aircraft piloting and nuclear powerplants has related distrust to failure avoidance. When non-routine strategies are needed, distrusting persons perform better, while when routine strategies are needed trusting persons perform better. This research was extended to entrepreneurial firms by Gudmundsson and Lechner. They argued that in entrepreneurial firms the threat of failure is ever present resembling non-routine situations in high risk settings. They found that the firms of distrusting entrepreneurs were more likely to survive than the firms of optimistic or overconfident entrepreneurs. The reasons were that distrusting entrepreneurs would emphasize failure avoidance through sensible task selection, and more analysis. Kets de Vries has pointed out that distrusting entrepreneurs are more alert about their external environment. He concluded that distrusting entrepreneurs are less likely to discount negative events, and are more likely to engage control mechanisms. Similarly Gudmundsson and Lechner found that distrust leads to higher precaution and therefore increases chances of entrepreneurial firm survival.

Researchers Schoon and Duckworth completed a study in 2012 that could potentially help identify who may become an entrepreneur at an early age. They determined that the best measures to identify a young entrepreneur are family and social status, parental role modeling, entrepreneurial competencies at age 10, academic attainment at age 10, generalized self-efficacy, social skills, entrepreneurial intention, and experience of unemployment.

Communication

Entrepreneurs need to practice effective communication both within their firm and with external partners and investors, in order to launch and growth a venture and enable it to survive. An entrepreneur needs a communication system that links the staff of her firm and connects the firm to outside firms and clients. Entrepreneurs should be charismatic leaders, so they can communicate a vision effectively to their team and help to create a strong team. Communicating a vision to followers may be well the most important act of the transformational leader. Compelling visions provide employees with a sense of purpose and encourage commitment. According to Baum et al. Kouzes and Posner the vision must be communicated through written statements and through in-person communication. Entrepreneurial leaders must speak and listen to effectively articulate their vision to others.

Communication is pivotal in the role of entrepreneurship, because it enables leaders to convince potential investors, partners and employees about the feasibility of a venture. Entrepreneurs need to communicate effectively to shareholders.Nonverbal elements in speech such as the tone of voice, the look in the sender's eyes, body language, hand gestures, and state of emotions are also important communication tools. The Communication Accommodation Theory posits that throughout communication, people will attempt to accommodate or adjust their method of speaking to others. Face Negotiation Theory describes how people from different cultures manage conflict negotiation in order to maintain "face". Hugh Rank's "intensify and downplay" communications model can be used by entrepreneurs who are developing a new product or service. Rank argues that entrepreneurs need to be able to intensify the advantages of their new product or service and downplay the disadvantages, in order to persuade others to support their venture.

Educational effects

Michelacci and Schivardi a pair of researchers who believe that identifying and comparing the relationships between an entrepreneur's earnings and education level would determine the rate and level of success. Their study focused on two education levels, college degree and post-graduate degree. While Michelacci and Schivardi do not specifically determine characteristics or traits for successful entrepreneurs, they do believe that there is a direct relationship between education and success, noting that having a college degree does contribute to advancement in the workforce.

Michelacci and Schivardi state there has been a rise in the number of self-employed people with a baccalaureate degree. However, their findings also show that those who are self-employed and possess a graduate degree has remained consistent throughout time at about 33 percent. They briefly mention those famous entrepreneurs, like Steve Jobs and Mark Zuckerberg who were college dropouts, but they call these cases all but exceptional, as it is a pattern that many entrepreneurs view formal education as costly, mainly because of the time that needs to be spent on it. Michelacci and Schivardi believe that in order for an individual to reach full success they need to have education beyond high school. Their research shows that the higher the education level the greater the success. The reason is that college gives people additional skills that can be used within their business and to operate on a higher level than someone who only "runs" it.

Project entrepreneurship

Project entrepreneurs are individuals who are engaged in the repeated assembly or creation of temporary organizations. These are organizations that have limited livespans which are devoted to producing a singular objective or goal and get disbanded rapidly when the project ends. Industries where project-based enterprises are widespread include: sound recording, film production, software development, television production, new media and construction. What makes project-entrepreneurs distinctive from a theoretical standpoint is that they have to "rewire" these temporary ventures and modify them to suit the needs of new project opportunities that emerge. A project entrepreneur who used a certain approach and team for one project may have to modify the business model and/or team for a subsequent project.

Project entrepreneurs are exposed repeatedly to problems and tasks typical of the entrepreneurial process. Indeed, project-entrepreneurs face two critical challenges that invariably characterize the creation of a new venture: locating the right opportunity to launch the project venture and assembling the most appropriate team to exploit that opportunity effectively. Resolving the first challenge requires project-entrepreneurs to access an extensive range of information needed to seize new investment opportunities. Resolving the second challenge requires assembling a collaborative team that has to fit well with the particular challenges of the project, and has to function almost immediately to reduce the risk that performance might be adversely affected.

Another type of project entrepreneurship involves entrepreneurs working with business students to get analytical work done on their ideas.

Bootstrapping

Entrepreneurs may attempt to "bootstrap-finance" their start-up rather than seeking external investors. One of the reasons that some entrepreneurs prefer to "bootstrap" is that obtaining equity financing requires the entrepreneur to provide ownership shares to the investors. If the start-up becomes successful later on, these early equity financing deals could provide a windfall for the investors and a huge loss for the entrepreneur. As well, if investors have a significant stake in the company, they may be able to exert influence on company strategy, CEO choice, and other important decisions. This is often problematic since the investor and the founder might have different incentives regarding the long term goal of the company. An investor will generally aim for a profitable exit and therefor promotes a high-evaluation IPO in order to sell their shares. Whereas the entrepreneur might have philanthropic intentions as their main driving force. Soft values like this might not go well with the short-term pressure on yearly and quarterly profits that publicly traded companies often experience from their owners.

One consensus definition of bootstrapping sees it as "a collection of methods used to minimize the amount of outside debt and equity financing needed from banks and investors". Most commonly, entrepreneurs engaging in bootstrapping incur personal credit-card debt, but they may utilize a wide variety of methods. While bootstrapping involves increased risk for entrepreneurs, the absence of any other stakeholder gives the entrepreneur more freedom to develop the company. Many successful companies - including Dell Computer and Facebook - started by bootstrapping.

Types of bootstrapping include:

External financing

Many businesses need more capital than can be provided by the owners themselves, and in this case, a range of options is available including:

Some of these sources provide not only funds, but also financial oversight, accountability for carrying out tasks and meeting milestones, and in the case of angel investors and venture capital, business contacts, mentoring and experience. Many external financing sources provide financing in return for an equity stake in an entrepreneur's company.

Effect of taxes

Entrepreneurs are faced with liquidity constraints and often lack the necessary credit needed to borrow large amounts of money to finance their venture. Because of this, many studies have been done on the effects of taxes on entrepreneurs. The studies fall into two camps: the first camp finds that taxes help and the second argues that taxes hurt entrepreneurship.

Cesaire Assah Meh found that corporate taxes create an incentive to become an entrepreneur to avoid double taxation. Donald Bruce and John Deskins found literature suggesting that a higher corporate tax rate may reduce a state's share of entrepreneurs. They also found that states with an inheritance or estate tax tend to have lower entrepreneurship rates when using a tax-based measure. But another study found that states with a more progressive personal income tax have a higher percentage of sole proprietors in their workforce. Ultimately, many studies find that the effect of taxes on the probability of becoming an entrepreneur is small. Donald Bruce and Mohammed Mohsin found that it would take a 50 percentage point drop in the top tax rate to produce a one percent change in entrepreneurial activity

Predictors of success

Factors that may predict entrepreneurial success include the following:

Methods

Market

Industry

Team

Company

Status