Another leader of economic approach is Theodore Schultz, who is an advocator of the neo-classical tradition. He considered entrepreneurial activity as a part of the stock of human capital. The entrepreneurial activity is an ability that people possess. Schultz developed entrepreneurship into an ability to deal with disequilibria in 1980 (Jaaskelainen, 2003).
Entrepreneurship is as a process by which people pursue opportunities, fulfilling needs and wants through innovations; without regard to the resources they currently control (Alam and Hossan, 2003). When look through the history of entrepreneurship, economic approach follows different topics: actor charging in large-scale production projects in middle ages, risk taking (Richard Cantillion) in 17th century, capital investor and entrepreneur (Jean Baptiste Say) in 18th century, manager (Francis Walker) in 19th century, innovator (Joseph Schumpeter) and moderate risk-taker (David McClelland) in early 20th century, and proactive was brought forward in recent years.
3.2 A critical analysis of economic approach:
As aforementioned, economic approach to entrepreneurship presented several main explanations: organiser of production, ability to spot opportunity, innovator and agent of change, risk-taking and creativity. They focus on the opportunistic and dynamic environment; when consider the entrepreneur as a driver of the changing economy.
But as Thomas Grebel, et al. stated ‘If we allow to think of the alertness to market opportunities and the agent’s implied human action as being a part of innovativeness neglecting the question whether a state of equilibrium in a dynamic economic world will ever be reached before another dynamic entrepreneur comes to prevent economy from equilibrium, it would leave us with the centre-piece of the Schumpeterian dynamics of economic change, i.e. entrepreneur.’ (Grebel, 2001) If so, in economic approach, it seems to be an open circle: no entrepreneur—no innovation—no dynamic—no evolution. This can be induced in a statement ‘entrepreneur is born not made; entrepreneur creates economic changing’, a paradox to the empirical evidence in economy development. Actually, entrepreneurship necessarily needs innate characters when entrepreneurial activities happen.
Economic theory defines entrepreneurial process with the economy change. But since the 1971 Bolton Report pointed out a relative decline of the sector in the 1930s (Deakins, 1999). The economy gradually benefited from the flexible businesses. From 1979 to the end of 1990, the numbers of small firms registered for VAT rose by approximately 420,000 (33 per cent). After 1990s, small firms account for 99.9 per cent of all enterprises in the UK. Can only be explained by economic factor when small firms became increasingly viable in the face of large corporate competition? So, Spinosa et al. stated, economic theory can not accurately account for all entrepreneurial activity.
Thus, there is more to entrepreneurship than economic approach explained. For example, entrepreneurial personality, social experience and culture background do all influence to entrepreneurship. Those should be studied in psychology and sociology.
4.0 Psychological approach to entrepreneur
4.1 Literature review:
Psychological approach concentrates on individual’s motives, traits and characters of entrepreneurial activity (Jaaskelainen, 2003). It intends to explain why some persons behave entrepreneurially and how they respond to special situations, such as risks, leadership during the management.
Psychological approach to entrepreneurship have experienced a revitalization recently because of the future importance of small-size enterprises and the entrepreneur is at the boundary line of individual work psychology (personality, work activities, etc) organisational psychology (Rauch and Frese, 2000). A leading researcher is McClelland (1961), who described the motivation of achievement as a nature of entrepreneurship. Achievement, power and affiliation are considered as three main points in his works, Socially Acquired Needs (McClelland, 1961). Another representation is Decisional Balance, put forward by Janis, Irving and Mann in 1977. It analyses entrepreneurial psychology as four stages: utilitarian and loses for self; utilitarian and loses for significant others; self-approval or disapproval; social approval or disapproval (Janis, 1977). These researchers emphasize the anticipation of personal affective reaction of sociological entrepreneurship.
There are also other scholars establish a psychological entrepreneurship model with five elements: intrinsic process motivation; instrumental motivation; external self concept-based motivation; internal self concept-based motivation; goal internalization. According to Leonard (1995) and Richard (2002), individuals primarily motivated by intrinsic process will only engage in activities which they consider fun. These individuals are often diverted from tasks that are relevant to goal attainment in order to pursue tasks which are intrinsically more enjoyable (Scholl, 2004). As a result, so long as the entrepreneurial businesses are enjoyable, these individuals will be strongly motivated to work hard and efficiently.
Additionally, psychological approach to entrepreneurship provides personal traits of entrepreneur. One of the foremasts is David Deakins. He concluded such ‘great person’ (Wickham, 2001), ‘social misfit’, ‘flamboyant extrovert’ as an entrepreneurial person’s genetic complements. He defined characteristics of the successful entrepreneur as resilience, attuned to opportunity, assertiveness, receptiveness to new ideas and comfort with power.
4.2 A critical analysis of psychological approach:
Psychological entrepreneurship builds on the presumption that an entrepreneur has a particular personality compared with non-entrepreneur (Philipsen, 1998). However, different problems have been identified with this approach. The concepts and definitions of personal traits differ substantially as well as the characteristics correlated with entrepreneurship (Gartner, 1989). The characteristics correlated with entrepreneurship found in studies are conflicting (Stevenson, et al., 1985) and many both successful and unsuccessful entrepreneurs have characteristics which are not in the list, which are regarded as no universal trait (Stevenson and Sahlman, 1987). There is no single style of a successful entrepreneurial characteristic can be identified in contingent circumstances. Person has different characteristics can be successful as long as an available method to process it. What’s more, an imagination of psychological entrepreneurship is difficult to find an empirical support in current study.
Another deficiency of psychological approach is a failure in accounting for economic surrounding influences in the generation of entrepreneurship. As Reynolds (1991) stated that psychological theory predicts entrepreneurship resulted from the ignorance of social context and choices confronting the individual when decision is made. And ‘Personal attitudes towards entrepreneurship are a ‘product’ of the current cultural environment… and are reinforced by education and legislation that again are products of the cultural system’ (Verheul et al.). But psychological approach focuses more innate and internal traits rather than those can be acquired and social-formed.
In summary, psychological approach to entrepreneurship lacks of integrated and systematic macro-environmental analysis as well as character generalisation in different circumstances.
5.0 Sociological approach to entrepreneurship
5.1 Literature review:
Sociological approach describes entrepreneurship as a part of the overall structure of value and status hierarchy (Jaaskelainen, 2003). It shows a wider sight of economic and psychological approaches. This approach considers sanctions presented by society and social structures to determine the extent and reasons for entrepreneur and its behaviours.
Less comment on entrepreneurship are made or born, the sociological theory instead focuses on entrepreneurship as purely observable behaviour, and in so doing to socially explain entrepreneurial management. As Cantillion stated (1986), ‘The entrepreneur scouts around, his sniffs out potentially profitably ventures, he forms hunches, and he reacts quickly if his hunches prove incorrect –otherwise he goes out of business. He is highly visible hand that ensures co-ordinator between producer and consumer.’
Social context also emphasizes an obvious difference from economic one. Reynolds differentiates in his works with four contexts in relation to entrepreneurial opportunity: social network, life course stage, ethnic identification, and population ecology stage (Virtanen, 1997). For the entrepreneur, involvement in causal informal networks may produce a major advantage (Reynolds, 1991, Granovetter, 1973). In contract to the transaction cost theory, sociological approach emphasizes trust, not opportunism (Larson, 1992). The life course context involves analysing situations and characteristics of individuals who have decided to become entrepreneurs (Markku Virtanen, 1997).
Sociological approach starting from ethnical identification tries to explain entrepreneurship as a process under the individual’s sociological background, which is one of the decisive ‘push’ factors to become an entrepreneur (Virtanen, 1997). Generally speaking, it puts more attention on the philosophy of a businessman. As Vesper states, ‘an entrepreneurship appears in a situation with threat, aggressive competitors, whereas to another businessman the same entrepreneurship may be an ally, a source of supply, a customer, or someone who creates wealth for others as well, who finds better ways to utilize resource, and reduce waste, and who produces jobs others are glad to get.’ (Vesper)
5.2 A critical analysis of sociological approach:
This approach, as a behavioural analysis, emphasises entrepreneurship as an organizing production factor (Philipsen, 1998). However, it is always impossible to transfer a business concept without also adapting it to local circumstances (Thurow, 2003). For example, the founders of Starbucks initially intended to bring the European coffee house to America. In European coffee houses everyone stands up for a quick coffee. Starbucks adapted the European coffee house concept to the America context by giving its U.S. customers a place to sit down in a comfortable chair and a leisure environment for drinking a cup of coffee. Starbucks has also been successful at taking its modified European coffee house back to Europe and make it an economic success there (Thurow, 2003). From this instance, it is obviously that sociological entrepreneurship has different styles for diverse behaviours and cultures. It is difficult for the present sociological approach to generalise all elements including customs, family background, ethnic root, immigrant culture and educational factor etc. There is no easy context of this approach can be widely acceptable.
Anther problem is neglect of function of innate traits and economic environment. In looking for an understanding, Stevenson & Sahlman and Gartner’s contributions lack of the personal traits but a narrow economic rational behaviour assumption (Philipsen, 1998). In fact, neither all the managerial processes are entrepreneurship; nor are all the entrepreneurial activities manager’s behaviours. Manager, small business owner and entrepreneur have shared some common characters with each other, but they appear different reaction when facing different economic circumstances. Furthermore, an entrepreneur depends not only on its behavioural style but an economic influence, which is a foundation for an entrepreneurial business surviving and developing. Entrepreneurship can’t be judged without its economic surrounding.
6.0 Conclusion:
As Kilby stated (1971) very illustratively compares entrepreneurship to the Heffalump, ‘all who claim to have a caught sight of him report that he is enormous, but they disagree on his particularities.’(Jaaskelainen, 2003). There is no consensus on approaches to entrepreneurship that everyone would agree each other. These three approaches have their own weaknesses as well as strengths when explaining entrepreneurship. On the base of above analysis, it can be definitely concluded that entrepreneurial process can’t be described in each separate theory. Economic growth, character change, and business behaviour should be connected in a comprehensive consideration (Casson, 2003).
There is a hypothesis presented in this literature study as following:
1: sociological approach 4: psychological approach
2: risk-taking 5: proactive
3: economic approach 6: innovative
In this hypothesis, psychological factors are considered as an innate character of entrepreneurship, because the approach emphasizes more nature and in-born elements rather than external factors of entrepreneurial activity. Those elements are regarded as internal determinations.
Closed to the inside circle, there is a triangulation. Each angle of the triangulation implies one of entrepreneurial characteristics: risk-taking, innovative and proactive. They are three basic foundations of entrepreneurship and support the entrepreneurial activity effectively.
Circling the triangulation, two round areas are separately economic approach and sociological approach. Sociological approach identifies entrepreneurial activity in the behavioural, managerial, operational scenarios; pays more attention to skill training, ability improving; while economic approach defines it in the opportunistic, strategic aspects, largely focuses on the existing commercial environment. These are external determinations and share influences to an entrepreneur with each other. Neither one of them can successfully describe entrepreneurship in their own theory.
Entrepreneurship is a dynamic process of creating incremental wealth, therefore, these three approaches should be connected with each other into a micro and macro consideration when explain the entrepreneurial phenomenon.
Also, there is a model presented by Armstrong M. (1990) can be a support of this hypothesis:
S = M × A × O
In this model, ‘S’ means success, ‘M’ denotes motivation, ‘A’ refers to ability, and ‘O’ implies opportunity. The right side of the equilibrium denotes the result of successful entrepreneurship; the left side of equilibrium are a combination of psychological, sociological and economic elements. Self motivation derives from psychology; teachable ability originates from sociology and changeable opportunity comes from economy. The model therefore combines elements of economics, social norms and individual traits as an explanation for successful entrepreneurial activity.
Summary, the final hypothetical conclusion of this literature study is a sheer complexity of entrepreneurship. It is obvious that entrepreneurs are not simply born nor easily made. The interplay of economic environment, social background, individual intelligence and motivation all have a strong influence over an entrepreneurial activity. Only once the factors of economic and social environment are aligned in a manner conducive to entrepreneurship can individual psychological traits come in to play.
7.0 Reference:
[1] Knight, F. H, 1921, Risk, Uncertainty and Profit, New York, Houghton Mifflin
[2] Kelly, G. Shaver, Linda R. Scott, Person, Process, Choices: The Psychology of New Venture Creation,
[2] Mikko Jaaskelainen, 2003, Entrepreneurship and Economic Growth,
[3] G. T. Lumpkin, If Not Entrepreneurship, Can Psychological Characteristics Predict Entrepreneurial Orientation?—A Pilot Study,
[4] David A.Harper, Foundations of entrepreneurship and economic development, New York: Routledge, 2003,
[5] Jahangir Alam and Mohammad Akter Hossan, Linking Between Franchising Networks for Entrepreneurship and Economical Development—Looking for A New Model, Paper to be presented at the EMNET-Conference on ‘Economics and Management of Franchising Networks’, Vienna, Austria, June 2003
[6] Thomas Grebel, Andreas Pyka, Horst Hanusch, An Evolutionary Approach to the Theory of Entrepreneurship, 2001
[7] David Deakins, the Small Firms and the UK Economy, 1999, P. 34
[8] M. Frese and A. Rauch, Entrepreneurship, Psychology of,
[9] Socially Acquired Needs, McClelland, David C. 1961, The Achieving Society, New York: Van Nostrand Reinhold
[10] Janis, Irving L. & Mann, Leon. 1977, Decision Making: A Psychological Analysis of Conflict, Choice, and Commitment, New York, the Free Press
[11] Richard W. Scholl, Motivation Inducement Model, Source: Leonard, N.H et al, A Self concept-based Model of Work Motivation, Proceedings of the Academy of Management Annual Meeting, Vancouver, B.C.
[12] Philip A. Wickham, Strategic Entrepreneurship: A Decision-Making Approach to New Venture Creation and Management, 2001: ‘A ‘great person’ is destined by virtue of his or her ‘nature’ to rise above the crowd. Such people are born to be great and will achieve greatness, one way or another.’
[13] Kristian Philipsen, Entrepreneurship as Organizing—A Literature Study of Entrepreneurship, Paper to be presented at the DRUID Summer Conference, Denmark,
[14] Markku Virtanen, The Role of Different Theories in Explaining Entrepreneurship,
[15] Karl Vesper, New Venture Strategies, P. 2
[16] Lester C. Thurow, Foreword,
[17] Mark Casson, Entrepreneurship,
[18] Robert D. Hisrich, Michael P. Peters, Entrepreneurship, 4th edition, 1998
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