Entrepreneurship Theories

The Birth Order Theory is a psychological theory that suggests that the order in which individuals are born in relation to their siblings has a significant impact on their personality development and experiences throughout their lives. This theory was popularized by psychoanalysts such as Sigmund Freud, Carl Jung, and Alfred Adler in the 1950s and has since become a widely studied and debated topic in the field of psychology. According to the Birth Order Hypothesis, depending on their position in the birth order, each child in a family goes through a different set of conditions and experiences. For instance, it's well knowledge that first-born children are more mature and goal-oriented, whereas younger siblings may be more inventive and rebellious. Only children may be more self-assured and egocentric, but middle children are regarded to be more autonomous and adaptable. The Birth Order Theory suggests that these differences in personality and behaviour can be traced back to the un...

The genetic approach to entrepreneurship looks to biological inheritance to explain the tendency for an individual to become an entrepreneur and succeed in entrepreneurial ventures. Research on genetic links is spurred on by considerable anecdotal evidence that the children of entrepreneurs are more likely to become entrepreneurs than the children of non-entrepreneurs. Genetic research tries to tease out family and environmental factors (learning, role modeling, and resources) from genetic factors. Nicolaou et al. (2008) conclude that when one twin becomes an entrepreneur then the other twin is more likely to, even when controlling for family upbringing and other environmental factors. They suggest that testosterone levels are inherited and related to the decision to become an entrepreneur. Later studies have added more depth to the analysis, looking to personality traits as mediators. For instance, Shane et al. (2010) study twins (with 50% and 100% similar genes) and conclud...

What is the radical subjectivist theory of entrepreneurship? Ludwig M. Lachmann was a German Economist who proposed a radical subjectivist theory of entrepreneurship as an alternative to existing Austrian School theories of entrepreneurship (e.g., altertness theory or uncertainty-bearing theory or creative destruction theory ). According to Lachmann, entrepreneurs develop plans according to their subjective knowledge and expectations. Expectations form as a result of the creative imagination of entrepreneurs, who may envision many competing futures. Entrepreneurs continually revise their plans as they encounter new bits of market information during exchange experiences. Capital is seen as continually recombining due to the process of capital regrouping. As capital is invested sub-optimally, errors lead to new temporary stocks of capital that need to be redeployed toward new purposes. Institutions are viewed as signposts that provide the rules of the game for millions of individu...

The misfit theory suggests that individuals who do not share the dominant cultural values of their society are more likely to attempt entrepreneurial careers as an alternative to traditional employment.    Hofstede et al. (2004) propose that individuals who feel like they do not fit in with the dominant culture may be dissatisfied with their job prospects and may be more inclined to start their own ventures. This theory has been used to explain why immigrants are often more entrepreneurial than native-born populations. Immigrants may face challenges in finding lucrative employment due to a variety of factors, including language and cultural barriers, differences in educational and professional credentials, and discrimination (Kahn et al., 2017). As a result, they may be more likely to pursue entrepreneurship as a means of creating their own economic opportunities and achieving financial success. In addition to the challenges faced by immigrants, the misfit theory of entreprene...

Founding a new venture is more common among individuals with greater access to financial capital because financial capital makes it easier to acquire the resources needed to start ventures. For instance, Evans and Jovanovic (1989) find that wealthier individuals are more likely to enter into entrepreneurship because they can risk their own capital. There is some evidence that many employees make the leap to entrepreneurship during liquidity events such as initial public offerings and acquisitions of their parent firms which can put significant financial resources into the hands of employees that own shares or options in the company. These employees, now flush with cash, have the financial freedom to spin out new ventures from their parent firms into independent companies (Stuart and Sorenson, 2003). Hurst and Lusardi (2004) find some evidence for liquidity constraints however only at the top of the range, suggesting that only very wealthy individuals are more likely to become e...

Among personality theories used by entrepreneurship researchers, locus of control has received considerable attention. The concept was developed in the 1950s by Julian Rotter who is an American psychologist working on social learning theories. Locus of control refers to an individual’s perception about the causes of their life conditions. External locus of control describes an individual that believes that most of their life conditions are determined by forces outside of their control, such as like deities, governments, power structures, institutions, and also fate or luck. Internal locus of control describes an individual that believes that they are their own master and can act to change their own life conditions. They are viewed as a continuum and most individual are situated between the two extremes of complete external control and total internal control orientations. When applied to entrepreneurs, those with an external locus might believe that their survival or success chance...

Contingency theory proposes that an organization's success is determined by how well its internal resources, structure, and strategies align with the external environment in which it operates. This external environment includes factors such as political, economic, social, and technological conditions. The concept of fit is central to contingency theory, as it refers to the degree to which the organization's characteristics match those of the environment in which it operates. A good fit between the organization and its environment can lead to greater success, while a poor fit can lead to inefficiencies and even failure. The understanding that there is no one-size-fits-all strategy for organizational design and administration is a major component of contingency theory. Depending on the particular environmental conditions in which they function, various organizations may require various structures, resources, and methods. For instance, a company operating in a highly regulated se...

Israel Kirzner is a British-American economist and emeritus professor at New York University. He is associated with the Austrian school of economics. Below, we review Kirzner's alertness theory of entrepreneurship. Kirzner argues that entrepreneurs balance supply and demand by detecting market imperfections and exploiting them. Market imperfections are caused by information asymmetry and bounded rationality.   Information asymmetry refers to cases where different stakeholders have varying information about a business venture. If one stakeholder uses the information advantage to profit from the another, it is engaging in opportunistic bargaining. Bounded rationality refers to the idea that humans are not perfectly rational. Neo-classical and Classical economics model the assumptions of economic man, and tend to ignore bounded rationality. According to Kirzner, the profits entrepreneurs receive from entrepreneurship are their reward for their tolerance of uncertainty ...

What is the disruptive innovation theory of entrepreneurship? Disruptive innovation theory of was developed by Harvard Business School professor Clayton Christensen in his famous book entitled The Innovator’s Dilemma (2003) . Christensen’s core argument is that new entrants succeed when they pursue disruptive innovation whereas incumbents tend to pursue sustaining innovations. Disruptive innovations are technologies, products and business models that are lower performing than incumbent offerings along traditional dimensions of performance, but compensate with increased simplify, convenience, customizability, or affordability. For example, the Nintendo Wii disrupted the Xbox and Sony Playstation by offering lower quality graphics in exchange for the simplicity in the intuitive movements offered by gyroscopic technology added to the controllers. This allowed younger children, game novices, and older gamers to be able to learn to play with a minimal learning curve. Sustaining inn...

The term emancipation has roots in Roman era practices of buying, selling and keeping slaves, but also wives and children. In Roman times, a son needed to be freed from the legal authority of the father to make his own way in the world. The term is also associated Lincoln’s Emancipation Proclamation, which, in the U.S., was used to criminalize slavery. In the women’s liberation movement, emancipation is associated with breaking free from bonds of marriage to a man. In a very interesting paper, Rindova and associates (2009) propose that entrepreneurship can be thought of as means of emancipation. They take a positive spin on a critical theory perspective. They define entrepreneuring as efforts to create new economic, social, institutional and cultural environments via the actions of groups or individuals. To bolster their arguments, they point out three key way in which entrepreneuring resembles emancipation processes. These are seeking autonomy, authoring, and making declarations. ...

What is the strategic disagreements theory of entrepreneurship? Steven Klepper (2007) was an American economist at Carnegie Mellon University. He introduced the used the concept of strategic disagreements to explain a particular type of entrepreneurship commonly referred to as spinout (or employee spinoff) entrepreneurship. Klepper credited spinouts with the creation of clusters like Silicon Valley and Detroit. A spinout occurs when an employee of a firm leaves to start a new business. Most spinout entrepreneurs create ventures that compete indirectly with their employers by pursuing new strategies or going after new markets with differentiated products. However, the seeds of spinout ventures often originate in parent firms. For instance, many entrepreneurs report that they are exploiting ideas that were generated inside of the organizations of their previous employers (Bhide, 1994). Strategic disagreements refer to disagreements between employees and managers regarding the pro...

What is the x-efficiency theory of entrepreneurship? Harvey Leibenstein , American economist, developed X-efficiency theory in the 1960s. He views entrepreneurs as gap-fillers and input complementors. Gaps (X-inefficiency) emerge when there are inefficiencies in markets, such as when incumbents do not utilize their resources efficiently (Leibenstein, 1966;1978) because of political, normative, cognitive, and structural factors. A classic example is the startup without a union that enters a market where all the incumbents have strong unions. The cost advantage of disorganized labor may help firms with low cost business models to thrive at the bottom of the market at margins that are uneconomical for incumbent firms to pursue within the target ranges given to them by their shareholders. If the maximum possible productive use of a resources is greater than the actual use by incumbents , an arbitrage opportunity emerges that an entrepreneur can exploit for profit. Entrepreneurs can ...

What is the achievement motivation theory of entrepreneurship? Harvard psychologist David McClelland developed the Achievement Motivation Theory in his book entitled The Achieving Society  in 1967. McClelland sought to explain why some societies are more economically successful than others. For answers, he looked at the entrepreneurial behaviors of individuals, which he thought were key to the development of all economies. According to McClelland, entrepreneurs do things in a new and better way and make decisions under uncertainty. Entrepreneurs are characterized by a need for achievement or an achievement orientation , which is a drive to excel, advance, and grow. By focusing in on a particular need, he was able to challenge the then prevailing  great man theory of entrepreneurship  as well as religious theories of entrepreneurship . He believed that entrepreneurship is learned and that such learning can be encouraged fruitfully. Need for achievement T...

Information Processing Theory is explained by Allen Newell and Herbert A. Simon (1972) in their book entitled Human Problem Solving. The book focuses on how humans think and process information. They view the human system as including the sensual, memory and arousal subsystems. Hansen and Allen (1992) borrow the theory of information processing to explain and predict the creation of new ventures. They start with the assumption that business environments produce information in varying quantities and varieties. For instance, a very simple environment might produce a small amount of very similar information, whereas a complex environment produces a large quantity of heterogeneous information. A complex environment might match a fast-paced, ever-changing high-tech industry, whereas a simple environment might match a slow moving traditional industry such as the restaurant industry. A single individual may find it difficult or impossible to cope with the information load that a compl...

What is the jack of all trades theory of entrepreneurship? The jack of all trades theory of entrepreneurship was proposed by Stanford University economist Edward P. Lazear in a working paper that was eventually published in The American Economic Review in 2004, entitle Balanced Skills and Entrepreneurship . The theory seeks to explain and predict who becomes and entrepreneur, and which entrepreneurs will be successful. According to Lazear, individuals that become entrepreneurs may have more balance in their investment strategy (on average) as compared with individuals that specialize employee roles. Jack of all trades, master of none, still better than a master of one? Lazear's core idea is that entrepreneurs need to be good at many different things, that is, they are generalists rather than specialists. For instance, when first starting out, a restaurant entrepreneur needs to select vendors for inputs such as food, furniture, equipment, and construction. He or she may als...

What is the expectancy theory of entrepreneurship? Expectancy theory was developed to explain work motivation and organizational behavior ( Kanfer, 1990 ). It has since been used to explain additional behaviors, including entry into entrepreneurship. Expectancy theory starts with the concept of motivational forces that Vroom (1964) expressed as an equation: MF = V x I x E, where V = valence, I = instrumentality, and E = expectancy. Valence refers to the value that an individual places on the outcome of their efforts—such as the importance of financial rewards. Instrumentality refers to the belief that if an individual meets performance expectations, that they will actually receive the reward. Expectancy is the belief or probability that an individual’s effort will result in the desired goal being achieved. Since the equation involves multiplication, it implies that if any one of the parts is zero then the motivational forces equal zero. Valance depends upon the individual’...

What is the self-efficacy theory of entrepreneurship? Bandura (1977) proposed that an individual’s belief in their ability to perform a given task can be conceptualized as self-efficacy. Self-efficacy is viewed as an antecedent to the formation of intentions. If an individual believes that they have the ability to achieve a goal, they are more likely to develop the intention to achieve the goal. By contrast, if an individual believes that they do not have the ability to achieve a goal, then they will not form intentions to purse the goal. Individuals develop self-efficacy over time as they obtain a variety of skills (cognitive, social, linguistic, or physical) through life experiences. Past achievements (e.g., mastery of a given task) reinforce self-efficacy, thus leading to more ambitious intentions (i.e., higher aspirations). Self-efficacy can also be gained via modeling the behaviors of others through close observation (i.e., vicarious or social learning), self-reflection, and ...

Scholars have long been fascinated by differences observed between cultures. For example, Thomas Cochran (1965) proposed that entrepreneurs are influenced by 1) their own attitudes toward their occupation, and 2) the expectations of groups facilitating new ventures, as well as 3) the difficulty level of  the operational requirements of the career. He argues that both attitudes of potential entrepreneurs and the expectations of investors are "culturally determined".   He looked to evidence in historical cases such as the entrepreneurial prominence of Protestants in America , Samurais in Japan , the Yoruba in Nigeria , the Kikuya in Kenya , Christians in Lebanon, the Halai Memon in Pakistan , and the Parsis in India . Each of these cases can be considered imperfect interpretations. Later on, Hofstede (1980) proposed that culture captures the set of values, beliefs, and expectations about behaviours that are shared by a social group. Cultural values can be unconscious or consc...

What is the resource scarcity theory of entrepreneurship? New ventures need to grow at a fast pace to keep up with incumbent firms. Oxenfeld and Kelly (1969) propose resource scarcity theory to explain which some new ventures choose franchising instead of chaining as a means of growth. A core assumption of the theory is that new ventures are founded below minimum efficient scale , such that there is a negative relationship between growth rate and failure of new ventures (Audretsch, 1995). Franchising  is  a quick way to expand a new venture with little upfront capital because the franchisees provide their own capital for their franchises. Since new ventures are often not able to access mainstream financial markets (e.g., for loans, bonds, and equity), franchising is an important alternative. Startups may also be less able to retain earnings to expand, given their commitments to initial investors who may want a quick return (Combs and Ketchen, 1999). Shane (1996) argues th...

The underlying assumptions of the upper echelons theory are that top managers' decision-making processes determine competitive strategies, and that such strategies affect firm performance (Hambrick and Mason, 1984).    Much of the research in Upper Echelon Theory has sought to demonstrate that decision-making processes are affected by the characteristics of individuals in top management positions as well as the composition of teams and the team dynamics. Competitive strategies may include the choice of business strategy, such as low cost, differentiation, and focus strategies. They may also affect corporate strategy such as vertical and horizontal integration, as well as diversification. Business and corporate strategies are well-known to affect the financial performance of firms and new ventures. When applied to entrepreneurial teams, characteristics that have been examined include age, formal education, length of job tenure, and functional experience. Heterogeneity, such ...

The knowledge spillover theory suggests that productive innovation comes from both incumbents (established firms) and new entrants (entrepreneurs and their organizations) (Acs et al., 2009; Audretsch and Lehmann, 2005). Knowledge is inherently leaky, and moves through networks and via stakeholder mobility. This is probably a good assumption given that many organizations find it very difficult to keep secrets. Whistleblowers, for example, demonstrate the limits secrecy when they leak information that is damning to their employers. Knowledge spillovers are an important driver of economic growth and development because they enable entrepreneurs to identify and exploit new opportunities. In the context of entrepreneurship, spillovers refer to the diffusion of knowledge and ideas from one organization or individual to another. This can happen in a variety of ways, including through informal networks, collaborations, and formal knowledge-sharing mechanisms. Entrepreneurship is fundament...

What is the regulatory focus theory of entrepreneurship? Regulatory focus theory was developed by psychologist  E. Tory Higgins of Columbia University in the 1990s. At the core of regulatory focus theory is the idea that individuals change between two states dubbed a promotion focus and a prevention focus. When in the promotion focused state, individuals attempt to bring themselves into alignment with their need for growth and advancement (their ideal self), causing them to focus on potential gains from risk-taking. By contrast, when individuals are in the prevention focused state, they tend to succumb to their needs for security and safety (their ought self), causing them to focus on potential losses from risk-taking. A recent meta-analysis confirms that regulatory focus is associated with several organizational outcomes. Brockner et al., (2004) borrow regulatory focus theory to explain entrepreneurial phenomena. They argue that entrepreneurial process requires a greater p...