FOUNDATIONS OF

ENTREPRENEURSHIP
NATURE OF ENTREPRENEURSHIP
NATURE AND DEVELOPMENT OF
ENTREPRENEURSHIP
Entrepreneur – An individual who takes initiative to bundle
resources in innovative ways and is willing to bear the risk and/or
uncertainty to act.
Being an entrepreneur today:
• Involves creation process.
• Requires devotion of time and effort.
• Involves rewards of being an entrepreneur.
• Requires assumption of necessary risks.

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NATURE AND DEVELOPMENT
OF ENTREPRENEURSHIP (CONT.)
Entrepreneurial action - Behavior in response to a
judgmental decision under uncertainty about a possible
opportunity for profit.

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TABLE 1.1 - ASPECTS OF THE
ENTREPRENEURIAL PROCESS

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THE ENTREPRENEURIAL PROCESS
Opportunity identification - The process by which an entrepreneur
comes up with the opportunity for a new venture.
Market size and the length of the window of opportunity are the
primary bases for determining risks and rewards.
Window of opportunity - The time period available for creating the
new venture.
Business plan - The description of the future direction of the
business.

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HOW ENTREPRENEURS THINK
Entrepreneurs in particular situations may think differently when
faced with a different task or decision environment.
Given the nature of their decision-making environment,
entrepreneurs need to sometimes:
• Effectuate.
• Be cognitively adaptable.
• Learn from failure.

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 How Entrepreneurs Think (cont.)

Causal process
• Starts with a desired outcome.
• Focuses on the means to generate that outcome.
Effectuation process
• Starts with what one has (who they are, what they know, and whom
they know).
• Selects among possible outcomes.
Entrepreneurial mind-set involves the ability to rapidly sense, act,
and mobilize, even under uncertain conditions.

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 How Entrepreneurs Think (cont.)

Cognitive adaptability describes the extent to which entrepreneurs

are:
• Dynamic, flexible, self-regulating and engaged in the process of
generating multiple decision frameworks focused on sensing and
processing changes in their environments and then acting on them.
It reflects in an entrepreneur’s metacognitive awareness.

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How Entrepreneurs Think (cont.)

• Achieving cognitive adaptability

• Comprehension questions – Aids understanding of the nature of the
environment before addressing an entrepreneurial challenge.
• Connection tasks – Stimulates thinking about the current situation in
terms of similarities and differences with situations previously faced
and solved.
• Strategic tasks – Stimulates thoughts about which strategies are
appropriate for solving the problem (and why) or pursuing the
opportunity (and how).
• Reflection tasks – Stimulates thinking about their understanding and
feelings as they progress through the entrepreneurial process.

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How Entrepreneurs Think (cont.)

• Entrepreneurs who are able to increase cognitive adaptability have

an improved ability to:
• Adapt to new situations.
• Be creative.
• Communicate one’s reasoning behind a particular response.

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 How Entrepreneurs Think (cont.)

Learning from Business Failure

• Uncertainty, changing conditions, and insufficient experience can
contribute to failure among entrepreneurial firms.
• An entrepreneur’s motivation is not simply from personal profit but
from:
• Loyalty to a product.
• Loyalty to a market and customers.
• Personal growth.
• The need to prove oneself.

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How Entrepreneurs Think (cont.)

• Loss of a business can result in a negative emotional response from

the entrepreneur.
• It can interfere with:
• Entrepreneur’s ability to learn from the failure.
• Motivation to try again.

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 How Entrepreneurs Think (cont.)

Recovery and Learning Process

• Emotional recovery from failure happens when thoughts about the
events surrounding, and leading up to the loss of the business, no
longer generate a negative emotional response.
• Primary descriptions of the process of recovering are:
• Loss-orientation.
• Restoration-orientation.

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How Entrepreneurs Think (cont.)

• Loss-Orientation
• Involves working through, and processing, some aspect of the loss
experience and, as a result of this process, breaking emotional bonds
to the object lost.
• This process gradually provides the loss with meaning and eventually
produces a changed viewpoint.
• Involves confrontation, which is physically and mentally exhausting.
• Characterized by feelings of relief and pain that wax and wane over
time.

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How Entrepreneurs Think (cont.)

• Restoration-Orientation
• Based on both avoidance and a proactiveness toward secondary
sources of stress arising from a major loss.
• Involves suppression, which requires mental effort and presents
potentially adverse consequences for health.
• Provides an opportunity to address secondary causes of stress.
• May reduce emotional significance of the loss.

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 How Entrepreneurs Think (cont.)

A Dual Process for Learning from Failure

• The dual process of oscillating between the loss-orientation and
restoration-orientation enables a person to:
• Obtain the benefits of each.
• Minimize the costs of maintaining one for too long.
• This dual process speeds the recovery process.

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HOW ENTREPRENEURS
THINK (CONT.)
• Practical implications of the dual process:
• Knowledge that feelings and reactions being experienced are
normal.
• Realizing that psychological and physiological outcomes
caused by the feelings of loss are “symptoms” can reduce
secondary sources of stress.
• There is a process of recovery to learn from failure, which
offers some comfort that current feelings of loss will eventually
diminish.
• Recovery and learning process can be enhanced by some
degree of oscillation.
• Recovery from loss offers an opportunity to increase one’s
knowledge of entrepreneurship.

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ETHICS AND SOCIAL RESPONSIBILITY OF
ENTREPRENEURS

Entrepreneurs usually develop an internal ethical code.

Personal value systems tend to be influenced by:
• Peer pressure.
• General social norms in the community.
• Pressures from their competitors.
Business ethics - The study of behavior and morals in a business
situation.

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 ROLE OF ENTREPRENEURSHIP IN
ECONOMIC DEVELOPMENT
Innovation is depicted as a key to economic development.
• Product-evolution process - Process through which innovation is
developed and commercialized.
• Iterative synthesis - The intersection of knowledge and social need that
starts the product development process.

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ROLE OF ENTREPRENEURSHIP
IN ECONOMIC DEVELOPMENT
(CONT.)

Three types of innovation:

• Ordinary - New products with little technological change.
• Technological – New products with significant technological
advancement.
• Breakthrough – New products with some technological
change.

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Figure 1.1 - Product Evolution

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SOCIAL FACTORS IN
NURTURING
ENTREPRENEURSHIP
SOCIAL CONDITIONS
1.Legitimacy of Entrepreneurship
2.Social Mobility
3.Marginality
4.Security

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LEGITIMACY OF
ENTREPRENEURSHIP

The relevance of a system of norms and values within a

socio-cultural setting for the emergence of entrepreneurship.

In which the degree of approval or disapproval granted

entrepreneurial behavior influences its emergence and
characteristics if it does emerge.

Schumpeter recognizes the importance of such legitimacy in

terms of appropriate social climate for entrepreneurship.

Entrepreneurship will be more likely to emerge in a setting in

which legitimacy is high.
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SOCIAL MOBILITY
Social mobility involves the degree of mobility, both social
and geographical, and the nature of mobility channels within
a system.

High degree of social mobility is conducive for

entrepreneurship.

Both Hoselitz’s need for ‘openness’ of a system and

McClelland’s need for ‘ flexibility’ imply the need for
possibility of mobility within a system for entrepreneurship
development.
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Brozen: According to him if it is too flexible, then individual
MARGINALITY
Individuals or groups on the perimeter of a given social system or between
two social systems provide the personnel to assume the entrepreneurial
roles.

They may be drawn from religious, cultural, ethnic or migrant minority groups
and their marginal social position is generally believed to have psychological
effects which make entrepreneurship particularly attractive for them.

Several factors are attributed to the increase in the likelihood of marginals

becoming entrepreneurs.

Ex: Presence of positive attitude towards entrepreneurship within the group.

High degree of group solidarity or cohesion

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SECURITY
Security is a significant factor for entrepreneurship
development.
This is reasonable too because if individuals are fearful
of loosing their economic assets or of being subjected to
various negative sanctions, they will not be inclined to
increase their insecurity by behaving entrepreneurially .

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THEORIES OF
ENTREPRENEURSHIP

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Entrepreneurship is an evolved thing. With the advancement
of science and technology it has undergone metamorphosis
change and emerged as a critical input for socio-economic
development.
Various writers have developed various theories on
entrepreneurship and popularized the concept among the
common people.
The theories propounded by them can be categorized as
under
Sociological theories
Economic theories
Cultural theories
Psychological theories

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SOCIOLOGICAL
THEORIES
Sociological Theories: The following theories explain how
sociological factors accelerate the growth of entrepreneurs:
1-Theory of religious beliefs
2- Theory of social change
Theory of religious beliefs
Max Weber has propounded the theory of religious belief.
According to him, entrepreneurism is a function of religious
beliefs and impact of religion shapes the entrepreneurial
culture. He emphasized that entrepreneurial energies are
exogenous supplied by means of religious beliefs. The
important elements of Weber’s theory are discussed further-

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1. Spirit of Capitalism- in the Weberian theory, spirit of capitalism is
highlighted. We all know that capitalism is an economic system in which
economic freedom and private enterprise are glorified, so also the
entrepreneurial culture.
2- Adventurous Spirit- Weber also made a distinction between spirit of
capitalism and adventurous spirit. According to him, the former is
influenced by the strict discipline whereas the latter is affected by free
force of impulse. Entrepreneurship culture is influenced by both these
factors.
3- Protestant ethic- according to Max Weber the spirit of capitalism can
be grown only when the mental attitude in the society is favorable to
capitalism
4 -Inducement of profit- Weber introduced the new businessman into the
picture of tranquil routine. The spirit of capitalism intertwined with the
motive of profit resulted in creation of greater number of business
enterprises.

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In fact, this theory suited the British rulers, who desired to encourage
European Entrepreneurship in India. This theory was vehemently
criticized by many researchers because of the unrealistic
assumptions.
Theory of Social Change Everett E. Hagen, in his theory of social
change propounded how a traditional society becomes one in which
continuing technical progress takes place. The theory exhorts the
following feature which presumes the entrepreneur’s creativity as the
key element of social transformation and economic growth.
Presentation of general model of the society- the theory reveals a
general model of the society which considers interrelationship among
physical environment, social structure, personality and culture.
Economic Growth : product of social change and political change :
According to Hagen, most of the economic theories of
underdevelopment are inadequate.
Rejection of followers syndrome : Hagen rejected the idea that the
solution to economic development lies in imitating western
technology. So the followers syndrome on the part of the
entrepreneur, is discouraged.

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Historic shift as a factor of initiating change- Hagen in his book, How
Economic Growth Begins, depicts historic shift as the crucial force which has
brought about social change technological progress thereby leading to the
emergence of entrepreneurial class from different castes and communities.
Withdrawal of status respects as the mechanism for rigorous entrepreneurial
activity- Closely consistent with the historic shift it is the social group that
plunges into rigorous entrepreneurism which experiences the status
withdrawal or withdrawal of status respects.
Hence, Hagen’s creative personality is the admixture of Schumpeters
innovation and McClellands high need for achievement, but Hagen’s analysis
fails to give policy measures for backward countries which are striving for
economic development as he identifies status withdrawal as the causal factor
in the emergence of creative personality. Hagen’s thesis of disadvantaged
minority groups has its own limitations. There are many disadvantaged
minority groups in India which have not supplied a good number of
entrepreneurs.

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ECONOMIC THEORIES
Entrepreneurship and economic development are interdependent.
Economic development takes place when a country' real rational income
increases overall period of time wherein the role of entrepreneurs is an
integral part.
Schumpeter’s Theory of Innovation Schumpeter’s theory of
entrepreneurship is a pioneering work of economic development.
development in his sense, implies that carrying out of new combination
of entrepreneurship is basically a creative activity
According to Schumpeter an entrepreneur is one who perceives the
opportunities to innovate, i.e. to carry out new combinations or
enterprise.
In his views, the concept of new combination leading to innovation
covers the following 5 cases-
1- The introduction of new goods, that is the one with which consumers
are not yet familiar, of a new quality.
2- The introduction of new method of production
3- The opening of new market 1-34
In view of the above, Schumpeterian theory of entrepreneurship has got
the following features-
1- Distinction between invention and innovation :Schumpeter makes a
distinction between innovation and invention. Invention means creation
of new things and innovation means application of new things onto
practical use
2- Emphasis on entrepreneurial function- Schumpeter has given emphasis
on the role of entrepreneurial functions in economic development.in his
views, development means basic transformation of the economy that is
brought about by entrepreneurial functions.
3- Presentation of disequilibrium situation through entrepreneurial
activity-the entrepreneurial activity represents a disequilibrium situation,
a dynamic phenomenon and a break from the routine or a circular flow
or tendency towards equilibrium.
4- Eentrepreneurialism dream and the will to found a private kingdom-
the motives of creating things and applying these things into practice
inspire the entrepreneur to undertake innovation.
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CRITICAL EVALUATION OF
SCHUMPETER’S THEORY OF
INNOVATION
1- THE THEORY HAS THE SCOPE OF ENTREPRENEURISM IN THE SENSE
THAT IT HAS INCLUDED THE INDIVIDUAL BUSINESSMAN ALONG WITH
THE DIRECTORS AND MANAGERS OF THE COMPANY.
2- Schumpeters innovating entrepreneurs represents the enterprise with the R & D
and innovative character. But developing countries lack these character.
3 The theory emphasizes on innovation and excludes the risk taking and organizing
aspects.
4. Schumpeter’s entrepreneurs are large scale businessman who introduce new
technology, method of production.
5- Schumpeter remained silent about as to why some economics had
more entrepreneurial talent than others. However, despite the above
criticisms, Schumpeterian theory is regarded as one of the best theories
in the history of entrepreneurial development.

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CULTURAL THEORIES
Advocates of cultural theories point out that entrepreneurship is the
product of culture. Entrepreneurial talents come from cultural values
and cultural system embedded into the cultural environment.
Hoselitz’s Theory : Hoselitz explains that the supply of
entrepreneurship is governed by cultural factors, and culturally
minority groups are the spark-plugs of entrepreneurial and economic
develoment.in many countries, entrepreneurs have emerged from a
particular socio-economic class.
He emphasized the role of culturally marginally groups like Jews and
the Greeks in medieval Europe, the Chinese in south Africa and
Indian in east Africa in promoting economic development.
PSYCHOLOGICAL THEORIES
Psychological theories center's around the psychological
characteristic of the individual in a society. Psychological
characteristics affect the supply of entrepreneurs in the society.

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 DRUCKER ON
ENTREPRENEURSHIP
Peter F. Drucker opined that “an entrepreneur is one who always
searches for change, responds to it and exploits it as an opportunity.” he
laid emphasis on two important factors – innovation and resource- that
led to emergence of entrepreneurship.
According to him, innovation is the real hub of entrepreneurship which
creates resource. A thing is regarded as resource when its economic
value is recognized. For example, mineral oil was considered worthless
until the discovery of its use. Similarly, purchasing power was
considered an important resource by an American innovative
entrepreneur who invented installment buying.
According to Drucker, successful entrepreneurship involves the following
things- Value and satisfaction obtained from resource by the consumer
are increased New values are created Material is converted into a
resource or exiting resources are combined in a new or more productive
configuration Entrepreneurship is the practice which has a knowledge
base. Entrepreneurship is not confined to big businesses and economic
institutions, it is equally important to small business and non-economic
institutions Entrepreneurship behavior rather than personality trait is
more important to enhance entrepreneurship The foundation of 1-38
Thus, Drucker has given his views that “an entrepreneur
need not be a capitalist or an owner.
A banker who mobilizes other’s money and allocates it in
areas of higher yield is very much an entrepreneur though he
is not the owner of the money.

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