ENTREPRENEURSHIP AND ECONOMIC DEVELOPMENT

by Meenakshi Valliappan on Friday 9 September 2011, 5:32 AM | Category: Entrepreneurial Development| View: 2617 views
 
 
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 What is Entrepreneurship?


The definition of entrepreneurship has been debated among scholars, educators, researchers, and policy makers since the concept was first established in the early 1700's. The term “entrepreneurship” comes from the French verb “entreprendre” and the German word “unternehmen”, both means to “undertake”. Bygrave and Hofer in1891 defined the entrepreneurial process as ‘involving all the functions, activities, and actions associated with perceiving of opportunities and creation of organizations to pursue them'. Joseph Schumpeter introduced the modern definition of ‘entrepreneurship' in 1934. According to Schumpeter, “the carrying out of new combinations we call ‘enterprise',” and “ the individuals whose function it is to carry them out we call ‘entrepreneurs'.” Schumpeter tied entrepreneurship to the creation of five basic “new combinations” namely: introduction of a new product, introduction of a new method of production, opening of a new market, the conquest of a new source of supply and carrying out of a new organization of industry. Peter Drucker proposed that ‘entrepreneurship' is a practice. What this means is that entrepreneurship is not a state of being nor is it characterized by making planes that are not acted upon. Entrepreneurship begins with action, creation of new organization. This organization may or may not become self-sustaining and in fact, may never earn significant revenues. But, when individuals create a new organization, they have entered the entrepreneurship paradigm.

The Supply of Entrepreneurship and Economic Development :

British economists such as Adam Smith, David Ricardo, and John Stuart Mill briefly touched upon the concept of entrepreneurship, though they referred to it under the broad English term “business management”. Whereas the writings of Smith and Ricardo suggest that they undervalued the importance of entrepreneurship, Mill goes out of his way to stress the significance of entrepreneurship for economic growth. In his writings, Mill claims that entrepreneurship requires ‘no ordinary skill”, and he laments the fact that there is no good English equivalent word to encompass the specific meaning of the French term ‘entrepreneur'.

The necessity of entrepreneurship for production was first formally recognized by Alfred Marshall in 1890. In his famous treatise Principles of Economics, Marshall asserts that there re four factors of production: land, labour, capital and organization. Organization is the coordinating factor, which brings the other factors together, and Marshall believed that entrepreneurship is driving element behind organization. By creatively organizing, entrepreneurs create new commodities or improve “the plan of producing an old commodity”. In order to do this, Marshall believed that entrepreneurs must have a thorough understanding about their industries, and they must be natural leaders. Additionally, Marshall's entrepreneurs must have the ability to foresee changes in supply and demand and be willing to act on such risky forecasts in the absence of complete information.

Marshall also suggests that the skills associated with entrepreneurship are rare and limited in supply. He claims that the abilities of entrepreneur are “so great and so numerous that very few people can exhibit them in all in a very high degree”. Marshall, however, implies that people can be taught to acquire the abilities that are necessary to be an entrepreneur. Unfortunately, the opportunities for entrepreneurs are often limited by economic environment, which surrounds them. Additionally, although entrepreneurs share some common abilities, all entrepreneurs are different, and their success depend on the economic situations in which they attempt their endeavors. 

One school of thought on entrepreneurship suggests that role of the entrepreneur is that of a risk-bearer in the face of uncertainty and imperfect information. Knight claims that an entrepreneur will be able to bear the risk of a new venture if he believes that there is a significant chance of profits. Although many current theories on entrepreneurship agree that there is an inherent component of risk, the risk-bearer theory alone cannot explain why some individuals become entrepreneurs while others do not. Thus, in order to build a development model of entrepreneurship it is necessary to look at some of the other characteristics that help explain why some people are entrepreneurs; risk may be a factor, but it is not the only one. 

Modern school of thought claims that the role of the entrepreneur is that of an innovator; however, the definition of innovation is still widely debatable. Kirzner suggests that the process of innovation is actually of spontaneous “undeliberate learning”. Thus, the necessary characteristics of the entrepreneur is alertness, and no intrinsic skills-other than that of recognizing opportunities-are necessary. Other school of economists claims that entrepreneurs have special skills that enable them to participate in the process of innovation. Leibenstein claims that the dominant, necessary characteristics of entrepreneurs is that they are gap-fillers i.e. they have the ability to perceive where market fails and to develop new goods or processes that he market demands but which are not currently being supplied. Thus, entrepreneurs have the special ability to connect different markets and make up for market failures and deficiencies.

Though the idea that entrepreneurs are innovators is largely acceptable, it can be difficult to apply this theory of entrepreneurship to less developed countries (LDCs). Often in LDCs, entrepreneurs are not truly innovators in the traditional sense of the word. Entrepreneurs in LDCs rarely produce brand new products: rather they imitate the products and production processes that have been invented elsewhere in the world (typically in developed countries). This process, which occurs in developed countries as well, is called “creative imitation”. Creative imitation takes place when when the imitators better understand how an innovation can be applied, used, or sold in their particular market niche (namely their own countries) than do the people who actually created or discovered the original innovation. Thus, the innovation process in LDCs is often that of imitating and adapting, instead of traditional notion of new product or process discovery and development. 

By combining the above thoughts it can be generalized that entrepreneurs are risk-bearers, coordinators and organizers, gap fillers, leaders, and innovators or creative imitators. Thus, by encouraging these qualities and abilities, governments can theoretically alter their country's supply of domestic entrepreneurship. 

Basic Types of  Entrepreneurship 
Apparently, it can be said that the starting point of entrepreneurship would define its type. The two types of entrepreneurship may be classified as:

1. Opportunity-based entrepreneurship- an entrepreneur perceives a business opportunity and chooses to pursue this as an active career choice.

2. Necessity-based entrepreneurship- an entrepreneur is left with no other viable option to earn a living. It is not the choice but compulsion, which makes him/her, choose entrepreneurship as a career.

Creating Indian  Entrepreneurs 

A recent Mckinsey & Company-Nasscom report estimates that India needs at least 8,000 new businesses to achieve its target of building a US$87 billion IT sector by 2008. Similarly, in the next 10 years, 110-130 million Indian citizens will be searching for jobs, including 80-100 million looking for their first jobs. This does not include disguised unemployment of over 50% among the 230 million employed in rural India. Since traditional large employers- including the government and the old economy player-may find it difficult to sustain this level of employment in future, it is entrepreneurs who will create these new jobs and opportunities.

Today's knowledge based economy is fertile ground for entrepreneurs, in India. It is rightly believed that India has an extraordinary talent pool with virtually limitless potential to become entrepreneurs. Therefore, it is important to get committed to creating the right environment to develop successful entrepreneurs. To achieve this, India must focus on four areas.

1. Create the Right Environment for Success: Entrepreneurs should find it easy to start a business. To do so, most Indians would start slow with capital borrowed from family and friends, the CEO playing the role of salesman and strategist, a professional team assembled months or perhaps years after the business was created, and few, if any, external partners. Compare this with a start-up in Silicon Valley: a Venire Capitalist (VC) or angel investor would be brought in early on; a professional management team would drive the business; a multifunctional team would be assembled quickly; and partnerships would be explored early on to scale up the business. A major challenge for India is to create a handful of areas of excellence- the breeding ground where ideas grow into businesses. Fr example, Gurgaon and Hyderabad for remote services, or Bangalore for IT. One way of strengthening these areas is to consider the role of universities and educational institutions-places where excellence typically thrives.

2. Ensure that Entrepreneurs have access to the Right Skill: A survey conducted by McKinsey & Company last year revealed that most Indian start-up businesses face two skill gaps: entrepreneurial (how to manage business risks, build a team, identify an get funding) and functional (product development know-how, marketing skills, etc.) India can move toward ensuring that the curriculum at universities is modified to address today's changing business landscape, particularly in emerging markets, and to build ‘centres of entrepreneurial excellence' in institutes that will actively assist entrepreneurs.

3. Ensure that Entrepreneurs have access to ‘Smart Capital': For a long time, Indian entrepreneurs have had little access to capital. It is true that in the last few years, several Venture Funds have entered the Indian Market. And, while the sector is still in infancy in India (with estimated total disbursement of less than US$0.5 billion in the year 2003), VCs are providing capital as well as critical knowledge and access to potential partners, suppliers, and clients across the globe. However, India has only a few angel investors who support the idea in the early stages before VCs become involved. While associations such as TIE are seeking to bridge the gap by working at creating a TIE India Angel Forum, this is India's third challenge creating a global support network of ‘angels'willing to support young business.

4. Enable Networking and Exchange: Entrepreneurs learn from experience-theirs and that of others. The rapid pace of globalization and fast growth of Asian economies present tremendous opportunities and challenges for India. Through planning and focus, India can aspire to create a pool of entrepreneurs who will be the region's –and the world's-leaders of tomorrow.

The Future of Entrepreneurship

Both the Central Government and various State Governments are taking increased interest in promoting the growth of entrepreneurship. Individuals are being encouraged to form new businesses and are being provided such government support as tax incentives, buildings, roads, and a communication system to facilitate this creation process. The encouragement by the central and state governments should continue in future as more lawmakers are realizing that new enterprises create jobs and increase the economic output of the region. Every state government should develop its own innovative industrial strategies for fostering entrepreneurial activity and timely development of the technology of the area. The states should have their own state-sponsored venture funds, where a percentage of the funds has to invested in the ventures in the states. 

Society's support of entrepreneurship should also continue. This support is critical in providing both motivation and public support. A major factor in the development of this societal approval is the media. The media should play a powerful and constructive role by reporting on the general entrepreneurial spirit in the country highlighting specific success cases of this spirit in operation. 

Finally, large companies should show an interest in their special form of entrepreneurship-intrapreneurship-in the future. These companies will be increasingly interested in capitalizing on their Research & Development in the hyper competitive business environment today.

Conclusion

The definition of entrepreneurship has evolved over time as the world's economic structure has changed and become more complex. Risk taking, innovation, and creation of wealth are the criteria that have been developed as the study of new business creations has evolved.

The decision to start an entrepreneurial venture consists of several sequential steps (1) the decision to leave a present career or lifestyle. (2) the decision that an entrepreneurial venture is desirable ; and (3) the decision that both external and internal factors make new venture creation possible.

There are both pushing and pulling influences active in the decision to leave a present career: the “push” of job dissatisfaction or even layoff, and the “pull” toward entrepreneurship of seeing an unfilled need in the market place. The desirability of starting one's own company is strongly influenced by culture, sub-culture, family, teachers, and peers. Any of these influences can function as a source of encouragement for entrepreneurship, with support ranging from government support that favour business to strong personal role models of family or friends, Beyond the stage of seeing entrepreneurship as a “a good idea”, the potential entrepreneur must possess or acquire the necessary education, management skills, and financial resources for launching the venture.

The study of entrepreneurship has relevance today, not only because it helps entrepreneurs better fulfill their personal needs but because of the economic contribution of the new ventures. More than increasing national income by creating new jobs, entrepreneurship acts as a positive force in economic growth by serving as the bridge between innovation and market place. Although government gives great support to basic and applied research, it has ot had great success in translating the technological innovations to products or services. Although intrapreneurship offers a promise of marriage of those research capabilities and business skills that one expects from a large corporation, the results have not been spectacular. This leaves the entrepreneur, who frequently lacks both technical and business skills, to serve as the major link in the process of innovation development, and economic growth and revitalization. The study of entrepreneurship and education of potential entrepreneurs are essential parts of any attempt to strengthen this link so essential to a country's economic well-being. 

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