INTRODUCTION ENTREPRENEURIAL THEORIES
Richard Cantillon’s theory
The concept of the entrepreneur (Joseph Schumpeter’s theory) The entrepreneur and profit (Ludwig Von Mises’s theory) The modernization of entrepreneurship and entrepreneur (Alexander Gerschenkron’s theory)
Economical Development Job creation Economic growth Contribution to GDP Evaluation of entrepreneur’s success Social Contributions Innovation Improvement of standard of living
Over the last few decades, ‘entrepreneurship’ has been a controversial topic between individuals and societies as researchers and economists cannot agree on what a concrete definition of an entrepreneur should be. Over and over again, people asked, a~what is an entrepreneur?’ To answer this question, it’s imperative that we examine a range of theories available today. Generally speaking, an entrepreneur is a leader who deals with entrepreneurship challenges to start a new venture, idea and/or enterprise in potential industries. For the most part, people argue that the term a~entrepreneur’ originated from a French economist by the name of Richard Cantillon. At that time, an entrepreneur is associated with the characteristic of willingness to take the responsibilities for the consequences of risk and uncertainty otherwise known as a a~risk-bearer.’ Today, entrepreneurs exist all over the different industries and they are churning the industries to become more competitive in nature. Many agree that the entrepreneurial activity is critically substantial to flourish the economy and the business industry (Cauthorn, 1989) and it’s required to move large corporations forward through innovative changes. Although theorists cannot agree on traditional definition of an entrepreneur, they do, however, agree on the importance of entrepreneur’s role and responsibility in society and in the economy. For these reasons, I am required to examine the range of entrepreneurship theories and how entrepreneurs contribute to our economy and society.
2.0 ENTREPRENEURIAL THEORIES
2.1 Richard Cantillon’s theory
Richard Cantillon was a French economist who greatly contributed to both the economy and other areas of society in the late 17th century and early 18th century. He wrote a number of books and journals during his life and one in particular, a~’Essai sur la Natur du Commerce en General,” that discussed and examine the role and characteristics of an entrepreneur. According to one famous economist, Murray Rothbard, Cantillon was the first theorist to coin the term entrepreneur. With Cantillon’s creative formulation, the entrepreneurs are the professional in solving on their tasks. He hires employees by paying for their labour prior to finish producing the product and testing it in the market first to see whether or not the goods will sell. It is difficult to determine the exact reaction of the consumer to our product and its prices. Therefore, sometimes, we may invest all of our money into renting land and paying wages to produce a product that does not even sell. In that case, we lose all of our investments. This unpredictability of the consumers’ behaviours and responses to our products quality and prices is what Richard Cantillon would classify as a~risk.’ As Cantillon would say, the individual who act as a market arbitrager and promises employees fixed income while dealing with the risk of unstable market price is a a~risk-bearer;’ an entrepreneur. Cantillon investigated that the entrepreneurs should be responsible for all the progress and consequences. For example, the entrepreneur should be a risk taker on his/her business whether it goes successful or not and he/she needs to be evaluated by the consumers in competitive market. In order to pay the wage for employees and land usage, the entrepreneur should earn the profit much more than his/her expenses. As the entrepreneur makes an uncertain profit due to an uncertain selling price, they should maximise their selling quantities. According to Cantillon, the entrepreneur is an individual that balances between supplies and demands in the economy.
2.2 The Concept of The Entrepreneur (Joseph Schumpeter’s theory)
This innovative trait was not highly considered as the most fundamental identity of an entrepreneurship back before Schumpeter made develop his theory. What he was investigating has been a factor that missed everyone’s mind at the time, but that is not important. The main reason why most people did not consider it is because economist cannot fit entrepreneurship into its theory for some reasons therefore some economics who already have done some work on entrepreneurship have the tendency to be follow Cantillon’s or Say’s way of thinking. But, for Schumpeter, he needed to investigate other ways of defining entrepreneurship and move away from the traditional models or to search for an alternative understanding. He then discovered that the entrepreneur provides a wide range of price options to have innovative trade and generally, they wish to buy materials with much cheaper price and sell them. Schumpeter used a different approach, compared to Cantillon, when defining his entrepreneur. He heavily emphasized the innovative characteristic as the main function of an entrepreneur. He stated that an entrepreneur is the person who creates new combinations from existing goods and resources in the market. The entrepreneur mainly focuses on developing new products, discovering new markets, investigating new type of organization. From Schumpeter’s point of view, the entrepreneur is the person who guides new way to create a totally new product. In other words, it is necessary for both the entrepreneurs and consumers. Old industries have lost its usefulness as newly generated innovative methods are introduced because with the new methods, production will be more efficient. The firm will be able to produce more at a lower cost. The production frontier will also be pushed outward. This makes old inventions obsolete and unwanted. Sometimes, even if the economy is depressed by some factors, there is adequate number of stock requested and it motivates the entrepreneurs to start being innovative again. In this way of circulation, Schumpeter utilized entrepreneurship to clarify economic growth, structural change, and business circle by exemplifying his arrangement of economic and his ideas.
2.3 The Entrepreneur and Profit (Ludwig Von Mises’s theory)
In capitalism, the entrepreneurs decide whether to invest or not to invest for their production. If they are unsuccessful to generate in efficient and cheapest way those products that the clients are demanding most urgently, they would be suffered losses and are ultimately dismissed from their competitive entrepreneurial position. Other better entrepreneurs who performed better would be replaced their position. Making decision is an essential activity for the entrepreneur. According to Ludwig Mises who was also Austrian economist, he said “he determines for what purpose the factors of production should be employed.” (Swedberg, p 91) Any other activities which entrepreneurs should perform are only unintentional to his entrepreneurial concern. Mises stated that there is a common rule that the difference between the entrepreneurs and non-entrepreneurs. Non-entrepreneurs would be confused profits how it should be maximised with other sources. The entrepreneurs are not always perfect of their performances due to some reasons. Their position would be reserved by them because they are more responsible and better fit for the performance than other people are in business dealing. They make profit not because they are smart in achieving their duty but they are smarter than other people are. They are not unerring and sometimes making error but they are less responsible and confused less than other people do in entrepreneurship. After of all, Mises concluded his theory that an entrepreneur makes profit by serving the consumers which means the relationship between them is considerably necessary because the primary factor indicating the entrepreneur whether to be successful or not is how they deal with the people, especially the consumers.
2.4 The Modernization of Entrepreneurship and Entrepreneur (Alexander Gerschenkron’s theory)
Many people will probably agree that the entrepreneurs are considered as the most essential element in the economy and its transformation. There are various ways to define an entrepreneur and it has been argued the definition of entrepreneur for a long time. According to Gerschenkron, for his purpose, it is appropriate to say that economic decisions are determined by the entrepreneurs. Whether it is a small or big decision, or whether the market price has been increased or decreased, all decisions in this process can be called, entrepreneurial decisions. These days, the industry needs large amounts of fixed capital to operate their system because it requires the property, land and machinery. This means entrepreneurs should predict far ahead and be able to make the right decisions into the future. Gerschenkron said the modern industry was indivisible either from the part of technological and organisational movement. New approached to the economy would be continuously appeared and it should be developed for both the entrepreneurs and economy. Now only few numbers of entrepreneurs were innovators but most of them are mimics, who were called as a~secondary wave’ by Schumpeter. The difference between the innovators and the mimics has not been identified clearly however every imitated product from mimics raises large numbers of technical and economical problems that has to be solved immediately. Generally, entrepreneurs use money as capital and employ staff in order to generate their production however it is very usual circulation how the industrialization is made of. The modern entrepreneurship should be created and new ways approaching to the entrepreneurship should be discovered to develop industrial revolution.
3.1 Job Creations
Although the number of employment opportunity has been on decline recent, as a result of the economic downturn and various other many reasons, the role of entrepreneur has still been considered as the key agent responsibility over creation of jobs. Even though most people associate entrepreneurship with self-employment, it is important to notice that in most cases, regardless of how small or big the firm is, a new start-up by an entrepreneur, more often than not, will generate jobs. Assuming that an entrepreneur is an innovative figure as argued by Schumpeter, then when he enters the market, he must be enter with either a new product or services or creating a completely new market segment. Because of this innovative edge, their company will likely to grow as demand increases. This upward demand would require that the firm hires more people to increase production. That is how jobs get created. Especially at this stage in the economic recession, entrepreneur is a substantial agent in helping move the economy forward and reducing unemployment. According to a recent study in the United Kingdom, the unemployment rate has become a serious issue as the rate continues to climb higher and higher. The figure below illustrates an upward sloping graph indicating that the number of unemployment rate has risen as more and more people fail to obtain a job or get fired. (as cited in trading economics, 2010) From this point, the role of entrepreneurs has been emphasised and they should create more job opportunities. If the government just push for new firms that are not innovative, the firm will probably only provide the same old jobs instead of creating something innovative. The old jobs are not preferable because they do not help in pushing the production efficiency upward. Therefore, we need to encourage the innovative designs of entrepreneurs to help push the production function outward through the creation of something innovative and then driving up demand, as a result of this creativeness, to alleviate unemployment.
3.2 Economic Growth
In a way, entrepreneurship and economic growth have a close connection with each other in the sense that when high levels of entrepreneurial activities are present, the economy seems to grow along with it as well. As Schumpeter have discussed in his papers, a growing number of entrepreneurs will boost up the development in economic growth. Swedberg (2000) stated that the significant changes in the economy fields would be managed by the entrepreneur and these important changes would be working slowly by themselves through the business circle. He also implied his thought of change was both economic aspects and social aspects. We still expect high volume of entrepreneurship would associate with economic growth and its development. Therefore, a large number of entrepreneurs should be encouraged to get involved in entrepreneurial activities and should continue to make progress in productive activities, because these activities will lead to economic development.
3.3 Contribution to GDP
Over the last few years, the entrepreneurs had contributed tremendously to the recovery of the economy by sustaining or boosting GDP growth, depending on the country. Though the total numbers of new business has slightly decreased, entrepreneurial enterprises still occupies a large percentage of the total number of firms in the country’s GDP (Gross Domestic Profit). Take the private sector in Vietnam for example, it has been estimated that the number of enterprises account for 39 percent of the country’s total GDP (a~Entrepreneurs’ contributions to national development”, n.d.). It has stated that “Vietnamese businesses and entrepreneurs have performed well in boosting up the national economy” (a~Entrepreneurs’ contributions to national development” n.d.). When the entrepreneur enters the market with his or her creative idea, he or she will attract more consumers to the product because it’s new and innovative. As more people seek out the goods, the demand for the goods will increase. This increase in demand translates to more supplies being required. The firm will need to produce more to not only meet the increased demand in the domestic market, but it will also have to produce more to meet increased demand internationally as well. This increase in production contributes directly into the Gross Domestic Products.
3.4 Evaluation of Entrepreneur’s Success.
Essential components to be successful in entrepreneurship are considered by many people. Based on its personality and characteristics, the performance of entrepreneur has direct impact to its success and it has been considered by four basic scales to decide whether they are successful or not. First, achievement in business field would be considered. It is the factual evidence how they are performing well in business and it should be first thing that should be indicated. Second, innovation in business should be considered. Based on innovators, it is always required to be innovative and acquisition of new change in business therefore entrepreneurs should be revolutionary innovative and try to attempt to be reformer. Next, entrepreneur should perceive personal control of business consequence. It is important for both the entrepreneurs and individuals due to recognition of business trends and movement. Lastly, entrepreneurs should have self-esteem in their business. It helps dealing with consumers and building reputation.
Drucker (a~Innovation and entrepreneurship’ Drucker, P. F.) has been telling us the story about William Conner, a salesperson in the medical industry who decided to start up his own business. Corner begins by having discussions about the problems that surgeons faced during their operations. From these discussions, he was able to learn a lot about the process of a cataract surgery and how it was amazingly easy to operate. While operating, surgeons must make sure that they cut one ligament that has proven to be risky. Conner researched further and learned that there’s an enzyme that can melt away those ligaments. He also figured out how to preserve these enzymes during operation procedures. Soon after, he received a patent for his product and that compelled him to enter the niche market with his new way to surgically remove cataracts. With the use of this case, Drucker illustrated how entrepreneurial activities can bring about innovation. William Conner did not care too much about the cataract surgery; he cared about making profits. It just so happened that when he tried to make the profit, he also contributed to society by inventing something new and improves in its ability to make people healthier. Although, we probably guess how the population will be changing in next few years, it will be so hard to get this kind of chance. These days, many entrepreneurs try to concentrate on a specific industry and on opportunities that already exist, even if it’s in small and declining industry. Therefore, once again, we must arrange and create policies that can encourage entrepreneurs to be more innovative because their innovations can truly help improve life.
3.6 Improvement standards of living
The industrial revolution was considered as one of the most important historical stage in terms of how it helped to improve the standards of living. Increase productivities, innovations, demand and economic growth have all combine to increase and improve employment opportunities. People who never had a job before now have a mean to make money and people who previously had jobs now can move on to a better paying job. With this new income, or increased income, people will be able to purchase more goods to make their life better and healthier. Entrepreneurship plays a significant role in this improvement in standards of living. Entrepreneurs are able to do this my generating more jobs for the people. With these jobs, they will be able to earn an income that can be used to sustain a better or improved lifestyle. Secondly, the innovative nature of an entrepreneur also contributes to this social betterment. As entrepreneurs seek out an opportunity in the market by bringing about new inventions or combination, they are improving the quality of life in the sense that those new inventions will make life easier, ergonomically speaking. For example, the invention of the iPhone was based on the intention of making money in the market, but as we have learned, it has truly helped people improve their standards of living in that the applications that exist in the iPhone can automate a lot of activities that would normally take manual labour. iPhone have the capacity to act a remote in various areas, make life less tiring.
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