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Theories of Entrepreneurship

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These are some Theories of Entrepreneurship that we’ve hand-picked to teach you so that you have an idea about Theories of Entrepreneurship! Let’s start with…

Innovation Theory

The Innovation Theory by Joseph Schumpeter, an Austrian economist & political scientist, believed that an entrepreneur could earn economic profits by introducing successful innovations. To gain more information, watch this video down below!

Innovation theory of profit posits that the main function of an entrepreneur is to introduce innovations and the profit in the form of reward is given for his performance. According to Schumpeter, innovation refers to any new policy that an entrepreneur undertakes to reduce the overall cost of production or increase the demand for his products.

Thus, innovation can be classified into two categories; The first category includes all those activities which reduce the overall cost of production such as the introduction of a new method or technique of production, the introduction of new machinery, innovative methods of organizing the industry, etc.

The second category of innovation includes all such activities which increase the demand for a product. Such as the introduction of a new commodity or new quality goods, the emergence or opening of a new market, finding new sources of raw material, a new variety, or a design of the product, etc.

The innovation theory of profit posits that the entrepreneur gains profit if his innovation is successful either in reducing the overall cost of production or increasing the demand for his product. Often, the profits earned are for a shorter duration as the competitors imitate the innovation, thereby ceasing the innovation to be new or novice. Earlier, the entrepreneur was enjoying a monopoly position in the market as innovation was confined to himself and was earning larger profits. But after some time, with the others imitating the innovation, the profits started disappearing.

An entrepreneur can earn larger profits for a longer duration if the law allows him to patent his innovation. Such as a design of a product is patented to discourage others to imitate it. Over the time, the supply of factors remaining the same, the factor prices tend to rise because of which the cost of production also increases. On the other hand, with the firms adopting innovations the supply of goods and services increases and their prices fall. Thus, on one hand the output per unit cost increases while on the other hand the per unit revenue decreases.

There is a point of time when the difference between the costs and receipts gets disappear. Thus, the profit more than the normal profit disappears. This innovation process continues, and the profits continue to appear or disappear.

Keynesian Theory

Keynesian economics by John Maynard Keynes, a British economist, is a macroeconomic economic theory of total spending in the economy and its effects on output, employment, and inflation. ... Based on his theory, Keynes advocated for increased government expenditures and lower taxes to stimulate demand and pull the global economy out of the depression.

For me, the Keynesian cross theory is a graph of expenditure and output level also a graph of different levels of equilibrium aggregate expenditure at different interest rate levels.

Since the investment spending is a function of interest rate when there is a change in interest rate which in turn results in a change in total output corresponding to the new equilibrium. Keynesian theorists argue that economies do not stabilize themselves very quickly and require active intervention that boosts short-term demand in the economy.

X-efficiency theory of entrepreneurship

What is the x-efficiency theory of entrepreneurship?

Harvey Leibenstein, the American economist, developed the X-efficiency theory in the 1960s. He views entrepreneurs as gap-fillers and input complementors. Gaps (X-inefficiency) emerge when there are inefficiencies in markets, such as when incumbents do not utilize their resources efficiently (Leibenstein, 1966;1978) because of political, normative, cognitive, and structural factors.

A classic example is a startup without a union that enters a market where all the incumbents have strong unions. The cost advantage of disorganized labor may help firms with low-cost business models to thrive at the bottom of the market at margins that are uneconomical for incumbent firms to pursue within the target ranges given to them by their shareholders.

If the maximum possible productive use of a resource is greater than the actual use by incumbents, an arbitrage opportunity emerges that an entrepreneur can exploit for profit. Entrepreneurs can also improve inputs by putting to use new resources, thus making existing products more efficient.

Incumbents can ignore, waste, or misuse resources due to inertia, incompetence, or ignorance. Thus, the entrepreneur is seen as correcting market inefficiencies by improving the information flow in a market.

X-efficiency theory seems to align well with Kirzner's view of entrepreneurship as alertness to opportunities caused by the lack of insight of incumbents.

Leibenstein’s thoughts focus mainly on two things: suggesting a theory of entrepreneurial economics and using this theory to explain the value of entrepreneurship within the economy. Rather than taking sides with a certain type of entrepreneurial activity, Leibenstein considers two sides, what he calls routine entrepreneurship (well-defined markets) and N-entrepreneurship (Schumpeterian-like). He introduces ways and possibilities of how both can exist within the economy, illustrating characteristics of the entrepreneur such as risk bearer, taking ultimate responsibility, gap-filler, input-completer, and the ability to evaluate economic opportunities.

Leibenstein’s procedure to both theories rests upon inputs and outputs of entrepreneurship (an example of the input would be a motivational factor) and the fact that entrepreneurship is a resource, a scarce one to be specific. Since his theory describes entrepreneurship as a resource, Leibenstein implies that entrepreneurship has value in the economy in the sense that the creation and fruition of tools and technology expand the economy and its features. But he states that because entrepreneurship is not predictable, controllable, or undetermined, it becomes scarce because the “up-and-coming” entrepreneurs have a lack of input-completing capacities. Thus, in some cases a well-defined market is impossible and that is his reason for considering both routine and N-entrepreneurship.

Leibenstein’s work is very credible in the sense that it outlines what an entrepreneur should do to be successful, and why we need entrepreneurship to exist. This passage would be helpful to a relatively new entrepreneur because Leibenstein is merely giving advice on how to be an input-completer and gap-filler, which he says makes for a successful entrepreneur.

Kirzner’s Learning-Alertness Theory

The basic concept in Kirzner's theory of entrepreneurship is alertness. ... The role of entrepreneurs lies in their alertness to hitherto unnoticed opportunities. Through their alertness, entrepreneurs can discover and exploit situations in which they can sell for high prices that which they can buy for low prices.

The book Competition and Entrepreneurship by Israel Kirzner, published in 1973, was a watershed moment in the revival of Austrian economics. While prices are the medium through which knowledge spreads in an economy, entrepreneurial activity–people recognizing previously unimagined opportunities to combine inputs into more valuable outputs–is the cause of that spread, according to Kirzner. Entrepreneurship is a discovery procedure, not a maximization exercise under given constraints. Markets are competitive, according to Kirzner, when the discovery procedure is unconstrained, rather than when markets match the assumed conditions of the textbook "perfect competition" model.

Alfred Marshall Theory

This theory was created by Alfred Marshall who was an English Economist. Marshall made a book called Principles of Economics published in 1890. So, if you what more information, watch this video down below!

Modern research on the economics of education began in the 1950s with research by T. W. Schultz, Jacob Mincer, Sherwin Rosen and some others, although there are earlier precedents, including analyses by Adam Smith, Alfred Marshall, and Milton Friedman. This new literature treats education as an investment that has both costs and returns. The returns analyzed are principally the increase in earnings because of greater amounts of schooling. The costs included tuition, fees, and other direct expenses from schooling, and the earnings foregone by being in school rather than at work. Higher education has boomed throughout the world during the past three decades in much poorer and in all rich nations. An important part of the explanation for this development is that new technologies, such as computers and the Internet, increased the demand for persons with college education because college graduates more easily utilize and adapt to these technologies. Other important developments explaining the greater incentives to get a higher education are the shift to high-skilled services, such as the education and health sectors, and away from manufacturing and increased globalization that helped spread the demand for these new technologies throughout the world.

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