The Role Of Entrepreneurship
Starting a business is often equated with entrepreneurship. So, what is entrepreneurship?
There are several theories that help to define what entrepreneurship is. Joseph Alois Schumpeter an Austrian economist is well known for his pioneering work on entrepreneurship. In his work “The Theory of Economic Development” he states that entrepreneurship causes economic growth as it allows the means of production in a society to be used in newer and more efficient ways and combinations. Other researches have confirmed that countries that have a higher level of entrepreneurship also have higher levels of innovation and technological change. A research by Daniel Smith entitled “The Role of Entrepreneurship in Economic Growth” also confirms that entrepreneurship has a significant impact on economic growth. For example, in the Malaysian Star of 15th August, 2013, The Finance Ministry’s secretary-general, Tan Sri Mohd Irwan Serigar Abdullah is quoted as saying after a briefing session for the 4th Global Entrepreneurship Summit (GES), which was held in Kuala Lumpur, “Without creative and innovative entrepreneurs, Malaysia will never realise a developed and high-income nation status. So, we are compelled to organise programmes of this sort”. In Malaysia in 2011, SMEs’ contributed 32% and and is expected to contribute 41% to GDP by 2020. It is also planned that SMEs’ contribution to employment will increase from 59% of the workforce to 61%; while export contribution is expected to increase from 19% to 25% and the number of registered firms from increased from 69% to 85%. This one example shows how vital entrepreneurship is to a nation’s economy.
There are many definitions of entrepreneurship. However, Schumpeter defined entrepreneurship in terms of innovation resulting in new means of production, new products, and new forms of organisation. These innovations cause creative destruction by making old inventories, ideas, technologies, skills, and equipment to become obsolete. He was of the view that this creative destruction causes continuous progress and improves the standards of living for everyone. Another important study which followed this view is the work of Professor Israel Kirzner. He was of the view that alertness to opportunity is the fundamental quality of the entrepreneur. Alertness is defined as the entrepreneur’s ability to perceive new economic opportunities and this alertness must necessarily precede actions taken to exploit the opportunities.
Another definition that helps to explain what entrepreneurship is, which describes what entrepreneurs do is the definition by Professor Howard Stevenson, the Sarofim-Rock Baker Foundation Professor Emeritus at Harvard University. He states that “Entrepreneurship is the process by which individuals pursue opportunities without regard to the resources they currently control”. The three keywords in the definition are “pursuit”, “opportunity” and “without regard to resources controlled”. In the Harvard Business Review (2003) Tom Eisenman, Howard H. Stevenson Professor of Business Administration at the Harvard Business School describes these keywords as below.
Pursuit
This refers to single-minded and and relentless focus the entrepreneurs display. As it is generally by conventional wisdom that opportunities do not wait for anyone, entrepreneurs perceive that opportunities would be available for a short time. With the limited resources, they have to work with urgency to make tangible progress in order to attract resources. This is not the case in an established companies where resources are already available and opportunities are group into portfolios.
Opportunity
This refers to something novel that is going to offer something that creates one or more of the following values:
- Creation of a truly innovative product
- Developing a new business model
- Improving an existing product or service by making it cheaper or better.
- Creating new customers for existing products
Without Regard To Resources Controlled.
This refers to constraints on resources. Most entrepreneurs have limited resources and have to bootstrap and have to invest their personal resources in the start-up until it gets to the stage where it is operational and begin to generate revenue. In some cases, the founders will have to look for resources beyond their control.
Many definitions of entrepreneurship have traditionally linked it with risk – taking. In reality entrepreneurs come in many forms and they are not people that just go out looking for risks. There are no human beings like that. According to Professor Eisenmann, the risks associated with entrepreneurship is as a result of pursuing novel opportunities without adequate resources. These risks can be divided into four types:
- Demand risk which is the risk that there may not be potential customers for the product or service.
- Technology risk which is related to situations where engineering or scientific breakthrough is required to establish the product or service.
- Execution risk which is the ability to attract staff and partners with the adequate skills to execute the venture.
- Financing risk which is the ability to acquire sufficient finance to execute the venture.
From the above it can be seen that there are certain factors that have stood out that commonly describes what entrepreneurs do. According to Dr Julie Holland, Director, Glendonbrook Centre for Enterprise Education Louborough University, these are “alertness”, “opportunity”, “creative skills” and “action”. This can be illustrated graphically as below:
We can see from the above that entrepreneurs are very good at recognising opportunities. This does not happen automatically, they listen, follow and study what is going on in the industry that is of interest to them. This is their passion. They also take action, as the saying goes “no risk, no gain”. The other thing is that they have creative skills that enable them to be successful and we are going to discuss this when we examine the entrepreneurial mind-set.
References
Eisenmann, T (2013). Entrepreneurship: A Working Definition. [online] Website name. Available at: https://hbr.org/2013/01/what-is-entrepreneurship[Accessed 05 Jan. 2018].
Holland, J. (2015) Innovation and Enterprise.
Schumpeter, J. A. (1934).The Theory of Economic Development: An Inquiry Into Profits, Capital, Credit, Interest, and the Business Cycle. Transaction Publishers. Google Books
Smith, Daniel (2010) “The Role of Entrepreneurship in Economic Growth,”
Undergraduate Economic Review: Vol. 6: Iss.1, Article 7.
Available at: http://digitalcommons.iwu.edu/uer/vol6/iss1/7