The Entrepreneurship Theory: An Overview

Abstract
Reviewing from the literature, the entrepreneurship theory can be clustered into three theories: Economy (macro), Sociology (group) and Psychology (individual). The economists are such as: Cantillon (1730). Jean-Baptiste Say (1800), Schumpeter (1911), Marshall (1994) Libenstein (1995) Gillis (1996), Jones (1995) etc state the conducive economy climate can encourage the entrepreneurship development by giving the first, economic opportunities; second, business information availability and third, transferring the technology.

The sociologist such as Weber (1904) argues that fourth, religions and ethnics groups have important role in the development of entrepreneurship. On the other side psychologists and other characteristics approach are such as: McClelland (1961), Palmer (1970). Kilby (1971), Sexton and Boulmer (1996), Druckers (1985), Ratter and etc mention that psychological aspect such fifth, achievement motive, risk taking, goal setting; sixth, locus of control; seventh, innovations, are very important in developing entrepreneurship.

From the 7 hypothesis developed from the literature review, the only two hypotheses accepted/supported from the 55 samples of the entrepreneurs. The accepted hypotheses for the successful entrepreneur are that first, business information availability is very importance for the entrepreneurs.

The role for the interventionists in giving the information is needed to develop the entrepreneurs. Program such training; mentoring and coaching will be very useful in this entrepreneurship program. Secondly, the high locus of control may be very important to take action to be entrepreneur. Interventionists can play the bigger role to encourage and strengthening the internal locus of control of the entrepreneurs.

I.    INTRODUCTION

The objectives of this research is to review the three theories that are economical theory related to the macro situation, sociological theory related to the social group and psychological theory related to the individual characteristics.

The word “entrepreneur” is a loanword from French. Baumol et all (1985) said that the entrepreneurship term is a loanword from French and was first defined by the Irish economist Richard Cantillon (1730). In French the verb “entreprendre” means “to undertake,” with “entre” coming from the Latin word meaning “between,” and “prendre” means “to take.” In French a person who performs a verb, has the ending of the verb changed to “eur,” comparable to the “er” ending in English.

Sullivan and Scheffrin (2003) state, that an entrepreneur is a person who has possession of an enterprise, or venture, and assumes significant accountability for the inherent risks and the outcome. It is an ambitious leader who combines land, labor, and capital to create and market new goods or services.

Entrepreneur in English is a term applied to the type of personality who is willing to take upon herself or himself a new venture or enterprise and accepts full responsibility for the outcome. Jean-Baptiste Say (1800), a French economist, believed to be coined the word Entrepreneur first in about at 1800. He said an entrepreneur is “one who undertakes an enterprise, especially a contractor, acting as intermediatory between capital and labor”.

II.     RESEARCH METHODS

Content analysis

Schwandt (2001) explains that content analyses as an instrument in grounded research are usually a form of textual analysis, categorizes chunks of text according to code and blend of qualitative and quantitative factors. Content analysis can be applied in any kind of written document and making inferences by identifying special characteristics of messages. Information is condensed (classified) and made systematically comparable by applying a coding scheme.

Content analysis sometimes called textual analysis when dealing exclusively with text is a standard methodology in the social sciences for studying the content of communication. Babbie defines it as “the study of recorded human communications, such as books, websites, paintings and laws.” Lasswell formulated the core questions of content analysis: “Who says what, to whom, why, to what extent and with what effect?”

Holsti (1969) offers a broad definition of content analysis as “any technique for making inferences by objectively and systematically identifying specified characteristics of messages.” Neuendorf (2002) offers a six-part definition of content analysis: “Content analysis is a summarizing, quantitative analysis of messages that relies on the scientific method (including attention to objectivity-intersubjectivity, a priori design, reliability, validity, generalizability, replicability, and hypothesis testing) and is not limited as to the types of variables that may be measured or the context in which the messages are created or presented.”

Model

From the three theories; economy related to the macro situation, sociology related to the group and psychology related to the individual, to the successful entrepreneurs, the model developed can be drawn as follow;

gbr ysp model

Samples

Samples of the entrepreneurs are 55 SMEs, who received credit from the BRI Bank. Content analysis is applied to analyze the transcript of the interview of the entrepreneurs. The types of business consist of food, souvenirs, home appliance, garment and agriculture. The success story of the entrepreneurs has been published entitled: Success Story of the Micro Entrepreneurs (Kisah Sukses Pengusaha Mikro). The successes of the entrepreneurs are defined from the bank view.

Trustworthiness and Validity of the Study

Thomas (2002) explained in how trustworthy are qualitative data that consists of consistency checks in data analysis, stakeholder checks, triangulation of data sources, and independent replication of findings. Whereas, triangulation techniques may involve: two or more data-collection methods, two or more research frameworks or perspectives, two or more data sources (using the same method) and two or more data analysis techniques.

In qualitative research, usually only related with small number of data. Application of multiple methods allows counterbalancing the strength of one another. Triangulation increases credibility of the results. Interviews are recorded with electronic devices and transcripted in writing. After all of the conversations are transcripted, the content analyzes were conducted for compilation.

Limitation

This research is limited to the samples of the entrepreneur, who received the credits and successfully pointed out by BRI. The future research can be developed for the broader samples. Even though the descriptive research is used, the hypotheses are still tested. Combine method is applied.

II.    THE ECONOMICAL THEORY

In general, the economists look at the “invisible hand” of entrepreneurship from the various angles of the opportunity, information, and technology.

Economy Opportunity

First, Schumpeter (1911) recognized the importance of the entrepreneur in exploiting opportunities and claimed that entrepreneurs would emerge if significant economic opportunities exist. Economic opportunities exist when there are disequilibria between demand and supply, more demand than supply.

Entrepreneurs will perceive and fill supply gap. Marshall (1994) says that unfortunately, the opportunities for entrepreneurs are often limited by the economic environment which surrounds them. Additionally, although entrepreneurs share some common abilities, all entrepreneurs are different, and their successes depend on the economic situations in which they attempt their endeavors.

To develop entrepreneurs, nations could increase demand by increasing welfare. Gillis (1996) states, that in order to achieve successful economic development, a country must experience both economic growth and “fundamental changes in the structure of economy”. Wilken (1979) suggests that policymakers can improve the economic factors that face potential entrepreneurs by initiating market reforms that both increase the market incentives and the availability of capital that is available to entrepreneurs.

As Leibenstein (1995) suggests, entrepreneurs are gap-fillers who perceive and correct for market deficiencies. Thus, so long as there are market deficiencies, there will naturally be demand for entrepreneurs to correct them. As a result, when governments promote the supply of entrepreneurship, they are essentially encouraging entrepreneurs to seek out what parts of the market demand them.

Hypothesis 1
The more opportunities of the businesses are, the more the entrepreneurs emerged will be to fill the opportunities gap. The less opportunities of the business are, the less the entrepreneurs emerged will be.

Among the interviewed entrepreneurs, it seems that 26 people (47%) open the business by seeing the opportunities. It means the others 29 people (53%) tend to run the business based on another reasons such as production skills. This data are not significantly support the hypothesis and the first hypotheses is not accepted.

Information

Second, Libenstein (1995) added information into the question. As Leibenstein claims, entrepreneurship arises “to make up for a market deficiency”. However, the majorities of mainstream economic models assume perfect information and clearly defined production functions. He noted that limited information, e.g. lack of market information, inadequate material sourcing information, etc. is realistic barriers to business start-ups.

Then, the establishment of information centers, e.g., industrial, trade, and export information, etc. are recommended to create entrepreneurs. Nations should produce and disseminate the information resources needed by the potential entrepreneurs.

Hypothesis 2
The more information is made available, the more entrepreneurs will emerge. The less information is made available, the fewer entrepreneurs will emerge.

The all of the entrepreneurs received information from BRI. The role of the bank as the information centre is very important to develop the successful entrepreneurs. The second hypothesis is accepted.

Technology

Third, following Schumpeter (1934) and Leibenstein (1968), entrepreneur may be defined as an individual who operates on his ‘best technique’ production function to obtain maximum possible output which is feasible with current technology and socioeconomic and physical environments. Friedman’s (1967) also mentions that an individual’s entrepreneurial competence can be specified by a production function which shows the maximum quantity of output which he is capable of producing under given conditions.

Jones (1995) says that technological change plays a central role in the explanation of economic growth, since on the steady state growth path the rate of per capita growth equals the rate of technological change. The particular functional form of knowledge production is explained by the assumption that the efficiency of knowledge production is enhanced by the historically developed stock of scientific-technological knowledge. Even the same number of researchers becomes more productive if the stock of knowledge increases over time

It can be found that the recipient nations in on going global movement and transfer of technology tend to have more entrepreneurs. For example, the movement of the computer technology to the low technology countries created entrepreneurs in a very wide field including the so many dealers and value added retailers in a very wide field including computer schools (training, undergraduate, graduate and doctoral), services and repairs, software consultants, etc.

Hypothesis 3
The greater a nation to transfer the technology is, the more entrepreneurs will emerge. The lower a nation to transfer the technology is, the fewer entrepreneurs will emerge.

The only 3 entrepreneurs (5%) are related to the technology even very low technology industry from 55 entrepreneurs. The third hypothesis is not accepted.

Among others, one major question of this theory is, given a favorable or conducive climate for enterprise formation, why is it that only a few (at best, only certain groups) can exploit the economic opportunities available? Can everyone in the same environment become entrepreneurs?

III.    THE SOCIOLOGICAL THEORY

The sociologist came to the rescue. They asked why some groups are more entrepreneurial than others. Among the many others, the more popular views took religion and ethnicity as important variables. Weber related the rise of capitalism to the change of the religious worldview, particularly among the Protestants in Europe.

He claimed that Protestants are indeed successful entrepreneurs. Weber (1904) also attributed the success of mass production partly to the Protestant ethic. Only after expensive luxuries were disdained, could individuals accept the uniform products, such as clothes and furniture, that industrialization offered.

But, why are other world-class religions such as Shinto or Buddhism in Japan and the Moslems in the Middle East can likewise produce successful entrepreneurs? And are other Protestant groups in other continents did not become entrepreneurially successful as their Euro counterparts?

The ethnic view claimed that some ethnic groups tend to be more entrepreneurial than others. Canella (1986) informs the famous examples, the Marwars in India, the Tamangs of Nepal, the Chinese communities in Hongkong, Singapore, South Korea, Taiwan and selected areas in the United States, The Lebanese in the Middle East, The Cebuanos in the Philipines and The Padangs in Indonesia.

Deep in the ethnic view is the thought that entrepreneurs are born and not created.

Hypothesis 4
The entrepreneurs are likely to be born according to the origin of ethnics group, rather than to be created.

Only two people (4%) of the entrepreneurs run their business inheriting their parents. So, there are much more entrepreneurs (53 entrepreneurs or 96%) who have to learn by themselves to be entrepreneurs. There are only 6 Padang people out of 55 people who are well known to be entrepreneur ethnic groups. Other people can also be successful entrepreneurs; even they are not Padang people. The forth hypothesis is not accepted.

If this ever, there is very little role for interventionists in this view.

IV. THE PSYCHOLOGICAL THEORY

Shaped by their own tools, the psychologists tend to focus on individuals. A modern synthesis of the entrepreneur is someone who specializes in taking judgmental decisions about the coordination of scarce resources (Lazear, 2005). In this definition, the term “someone” emphasizes that the entrepreneur is an individual. The more popular views ask why some individuals become entrepreneurs, and others do not. Three of the popular views are briefly presented below.

Achievement Motive

First, McClelland (1961) contends that generally human beings have three social motives, viz.; achievement, affiliation, and power motives. He further found that successful entrepreneurs have relatively high achievement motive or need for achievement (Nach). By participating, in a systematic training, like Achievement Motivation training (AMT), one can increase his or her achievement motive. Achievement motives consist of goal setting, moderate risk taking and feedback.

Swoboda, (1983). claims that an entrepreneur will be willing to bear the risk of a new venture if he believes that there is a significant chance for profit and suggests that the role of the entrepreneur is that of a risk-bearer in the face of uncertainty and imperfect information.

Marshall (1994) cites that entrepreneurs must have the ability to foresee changes in supply and demand and be willing to act on such risky forecasts in the absence of complete information.

Cantillon (1755) mentions that entrepreneur works for uncertain wages, so to speak, and all others for certain wages until they have them, although their functions and their rank are very disproportionate. The General who has a salary, the Courtier who has a pension, and the Domestic who has wages, are in the latter class. All the others are entrepreneurs, whether they establish themselves with a capital to carry on their enterprise, or are entrepreneurs of their own work without any capital, and they may be considered as living subject to uncertainty.

Entrepreneur was considered earlier as a risk-taker as Kilby (1971) portrayed an entrepreneur as the individual who assumed the risk for the firm. Similar perspective was echoed by Palmer (1970), Sexton and Bowman (1986), Ray (1990, 1994) among others.

Hypothesis 5
The higher the achievement motive owned by someone is, the higher the possibilities that the person will, sooner or later, become an entrepreneur. The lower the achievement motive owned by someone is, the lower the possibilities that the person will become an entrepreneur.

Based on the interview, none of the 55 entrepreneurs really want to be entrepreneur. 4 people (7%) open the business after working in the same field of business from other people. One person (2%) opens the business due to the terminated from his previous employment. Just the same, only one person becomes an entrepreneur after retiring from teaching in a junior high school. The entrepreneurs do not have any goal setting to be entrepreneur or calculating the risk to be entrepreneur. The fifth hypothesis is not accepted.

The McClleland’s theory raised many questions. Some of them are:

Can the process be reversed? Using the same methodology suggested by McClelland, some psychologists found that some professionals, who are not entrepreneurs, but ordinary mortals like managers, government officers, or facilitators/trainers, also showed relatively high scores on achievement motive. Hence, high achievement is not necessarily owned by entrepreneurs only. Therefore, the Achievement Motivation Training graduates can become a manager, a government official, a teacher, or just about any other successful person, including but not necessarily becoming entrepreneurs. Thus, the achievement motive is not a very significant factor in developing entrepreneurs.

The emergence of numerous successful entrepreneurs who achieved very high scores on affiliation motive negates McClelland’s concept. These entrepreneurs became successful because of high affiliation motive such as wide networking, high visibility, and significant access to the powers that be.

Business done by entrepreneurs is a rational matter. Will social motives, mainly achievement motive, be likewise suitable for developing entrepreneurs? Why do not we focus on developing the economic or business motives for entrepreneurs?

Locus of Control

Second, Ratter states that successful entrepreneur should have high internal locus of control or high self-confidence, where some one believes that something is happened because of his/her efforts and actions and it is not because of luck merely. Someone has high external locus of control, it does not suit to be entrepreneur.

According to Praag (1995), opportunity is “the possibility to become self- employed if one wants to.” The primary factors affecting opportunity include one’s intrinsic entrepreneurial ability, starting capital, ease of entry into the market, and the general macroeconomic environment.

Alternatively, willingness is the relative valuation of work in self-employment compared to one’s other options for employment. In terms of opportunity cost, an individual’s willingness is positive whenever self-employment is perceived as the best available career option. Thus, willingness is inherently affected by the anticipated market incentives that are available for would-be entrepreneurs, namely profit and economic benefits.

Hypothesis 6
The higher the internal locus of control is, the higher the person to be entrepreneur will be. The higher the external locus of control is, the lower the person to be entrepreneur will be.

The question is that so many people have high external locus of control also be a successful entrepreneurs. For example, almost all Chinese do layout their offices for their business according to their traditional layout. (In Chinese, it is called “Feng Sui” or “Hong Sui”).

Chinese believes that layout without this system will be unsuccessful in a business. Many Chinese assume that business success is caused mainly due to the luck (in Chinese is called “hokee”). Entrepreneurs in making planning use horoscope to the future or “shio”, it is not only using scientific method and so many paranormal and magician act as advisors for the successful entrepreneurs.

However, from this research, even 55 entrepreneurs do not really want to be entrepreneur and most of them (49 people or 89%), instantly run their businesses, with all of the difficulties to be solved. High self confidence to develop the owned business is the main prime mover. They work hardly with inner direction to be success in their businesses. The sixth hypothesis is accepted.

Innovation

Third, Schumpeter (1934) contends that an entrepreneur devises new products, services or production methodologies to maximize production. Drucker (1985) indeed defined entrepreneurship as innovation in a production unit as the entrepreneur generates new approaches in order to obtain maximum possible output from limited resources.

Cantillon (1730) formally defines the entrepreneur as the ‘agent’ who buys means of production at certain prices in order to combine them into a new product. Say (1816) supported this arguing that entrepreneur brings all other factors of production together in order to build a single productive organism. Leibenstein (1995) suggests that entrepreneurs have the ability to combine various inputs into new innovations in order to satisfy unfulfilled market demand.

Although many economists accept the idea that entrepreneurs are innovators, it can be difficult to apply this theory of entrepreneurship to less developed countries. Often in less developed countries, entrepreneurs are not truly innovators in the traditional sense of the word.

For example, entrepreneurs in less developed countries rarely produce brand new products; rather, they imitate the products and production processes that have been invented elsewhere in the world (typically in developed countries).

Drucker (1985) mentions that this process, which occurs in developed countries as well, is called “creative imitation” The term appears initially paradoxical; however, it is quite descriptive of the process of innovation that actually occurs in less developed countries.

Creative imitation takes place when the imitators better understand how an innovation can be applied, used, or sold in their particular market niche (namely their own countries) than do the people who actually created or discovered the original innovation.

Thus, the innovation process in less developed countries is often that of imitating and adapting, instead of the traditional notion of new product or process discovery and development.
Schumpeter, (1951) defines the entrepreneur as the “agent who buys means of production at certain prices in order to combine them” into a new product

Hypothesis 7
The more innovative the people are, the more the people to be entrepreneurs will be. The less innovative the people are, the less the people to be entrepreneur will be.

From the 55 entrepreneurs, the only two can be considered as innovators that are tempura meat ball and three wheels motorcycles. Most of the entrepreneurs run with the usual products and standard business. The seventh hypothesis is not accepted.

CONCLUSIONS

The recapitulation of the research result can tabled as follow:

gbr ysp conclusion

From the 7 hypothesis developed from the literature review, the only two hypotheses accepted from the 55 samples of the entrepreneurs. The accepted hypotheses for the successful entrepreneur are that first, information is very importance for the entrepreneurs.

The role for the interventionists is needed to develop the entrepreneurs. Program such training; mentoring and coaching will be very useful in this entrepreneurship program. Secondly, the high locus of control must be very important to take action to be entrepreneur

APPENDIX

Type of Business
Food
1.    Fried chip
2.    Bean Sprouts
3.    Nata de coco
4.    Steam and salted fish
5.    Cracker eel
6.    Banana chips
7.    Tumbu sugar
8.    Tapioca
9.    Coffee
10.    Coconut milk
11.    Smoked fish
12.    Kudus Thick Porridge
13.    Mlinjo Chips
14.    Tempura mead balls
15.    Lempuk durian
16.    Roasted peanuts
17.    Chicken meat seller
18.    Cassava chips
19.    Aloe vera

Souvenir
20.    Gold jewelry
21.    Souvenir for wedding
22.    Leather handy craft
23.    Ceramic craft
24.    Mask handycraft
25.    Toy
26.    Mendong handy craft
27.    Antique brass
28.    Banana leaves photo album
29.    Balinese gamelan
30.    Leather puphet
31.    Water hyantich
32.    Painting studio
33.    Natural stones

Home appliances
34.    Rattan furniture
35.    Bricks
36.    Plate stone
37.    House
38.    Gypsum

Garment
39.    Sandals
40.    Women underwear
41.    Woven clothes
42.    Balinese woven clothes
43.    Hand embroidery
44.    Embroidery veils
45.    Ulos
46.    Shuttle cock (others)

Agriculture
47.    Apple cultivation
48.    Vegetable plantation
49.    Fishing area
50.    Flower cultivation
51.    Plant seeding
52.    Mahkota Dewa

Technology
53.    Car exhaust
54.    Three wheels motor cycle
55.    Stove tanks

Location of entrepreneurs
Central Java            11
East Java            10
Jakarta and Jabodetabek    9
West Sumatra    (Padang)    6
Bali                 4
South Sulawesi        3
West Java            3
Bengkulu            3
Jogja                2
North Sulawesi        2
Others                5

References

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*Presented in International Indonesia Conference on Innovation Entreprenership and Small Business, ICIES 1 ITB, Bandung, 20-23 July 2009.

Yanto Sidik PratiknyoYanto Sidik Pratiknyo, PPM-Manajemen, Jakarta, Indonesia
Founding Member of International CEFE Association for Entrepreneurship, Frankfurt Germany
yantosp@yahoo.com

One thought on “The Entrepreneurship Theory: An Overview

  1. thank you for the info. we share for Success or failure of an individual depends on 3 main factors, namely: ask
    T : Talent
    A = Attitude
    S = Skills
    K = Knowledge
    may be useful

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