A Comparative Discussion of Different Approaches to Entrepreneurship

1.0 Introduction:

There is no a universal theory exists in entrepreneurship by now. The entrepreneurship consists of several different approaches including psychological, sociological, anthropological, economic and regional science areas.

Each school has its own opinion, so does every scholar. For example, Robert Hisrich mentioned (1985) entrepreneurship is the process of creating something differently with value by devoting the necessary time and effort, assuming the accompanying financial, psychological and social risks, and receiving the resulting rewards of monetary and personal satisfaction. Stephen Spinelli, et al. in Babson College recently also presented a definition as a way of thinking, reasoning, and acting that is opportunity obsessed, holistic in approach, and leadership balanced.

The analysis of concept of entrepreneurship and its meaning is such a large topic to cover in a single paper. Thus, dipping into an inch of research, this study concentrates only on economic, psychological and sociological approaches and displays several previous significant opinions. At the end of discussion, the researcher brings out its hypothetical conclusion of comprehensive consideration.

2.0 Methodology:

This is a literature study. The paper is divided into three main sections in terms of economic, psychological and sociological approaches.

The author set about consulting the lecture handouts from the course to create a list of points to consider, after which a selection of books from the library were chosen for further study, report outline being upgraded and enlarged when suitable new points were found.

At the same time, a search on the Internet using keywords such as ‘economic entrepreneurship’, ‘psychological entrepreneurship’ and ‘sociological entrepreneurship’ was carried out, resulting in thousands of pertinent responses being displayed. In making a critical selection, about 100 articles organized as an electronic-formatted literature, including journals, periodicals, and works citations which were found to be of interest to this research. After reviewing and filtering, the researcher has recapitulated the main points as stated in the main body.

3.0 Economic approach to entrepreneurship

3.1 Literature review:

To an economist, an entrepreneurship is the process an entrepreneur brings resources, labour, materials, and other assets into combinations that make their value greater than before, and also one who introduces changes, innovations and a new order (Hisrich and Peters, 1998). This is a popular expression of economic approach to entrepreneurship. When explain economic entrepreneurship, an entrepreneur is concentrated on functional role in the economic developing process (Jaaskelainen, 2003).

It was Richard Cantillion (1680-1734), a French economist, who gave the first recognise of entrepreneurship in economy. He divided the economic agents into three classes: landowners, entrepreneurs and hirelings. In his theory, entrepreneurs were considered as an economic function, independent from occupation and facing uncertainty as trying to gain profits (Knight, 1921). Cantillion’s theory was later on divided into three schools: German tradition, Austrian tradition and Neo-classical tradition.

With the development of economy, understanding of entrepreneurship improved. Following Cantillion, Joseph Schumpeter (1883-1950) set his theory of economic entrepreneurship based on the dynamic and innovative characters, which was originally written in Theory of Economic Development in1911(Jaaskelainen, 2003). He argued that the entrepreneurial process can never be stationary, but continuously change. He put forward a concept for the continuous change as ‘creative destruction’. At the same time, the innovation is induced in his opinion as ‘incessantly revolutionises the economic structure from incessantly destroying the old one and incessantly creating new one’ (1987).

Compared with Schumpeter’s opinion, the Austrian tradition emphasizes the profit opportunity perceiving of entrepreneurship. It was Israel M. Kirzner, 1994, who defined economic theory as a market agent with the propensity to notice and the drive to exploit profit opportunity.1 Thus, ‘Entrepreneurship, rigorously defined, refers to the creation of a new economic entity centred on a novel product or, at the very least, one which differs significantly from products or services offered elsewhere in the market place'(Curran and Stanworth) .

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).