Entrepreneurship Theories

What is the pecking order theory of entrepreneurship? The pecking order theory was developed by in the 1980’s by finance scholars seeking to understand the financing preferences of firms. Pecking order theory also relates to entrepreneurs’ preferences about financing choices. Financing options include using one’s own personal funds, reinvesting profits back into the business, selling equity to outside investors, and bank debt or loans. At the core of the theory are information asymmetries between the entrepreneur or the startups’ executive team, and the prospective sources of funds for the business—that is, the financiers. Entrepreneurs and other insiders have better information about the business’ operations and potential than do prospective financiers because the former deal with stakeholders and problems on a day to day basis. Financiers usually have to rely on second hand information provided by the leadership team of the startup and the financial statements they provide.

What is the resource based theory of entrepreneurship? Jay Barney developed the resource based view of the firm, which is a strategic management theory designed to explain why some firms perform better than others even when they occupy a very similar business environment. The resource-based view seeks to explain why some firms perform better than others by looking to the firms’ resources. This contrasts with earlier perspectives, such as  Porter's five forces , which focus on the external environment as sources of threats and opportunities. The core idea behind the resource-based view is that  competitive advantage  comes from a firm’s effective use of tangible and intangible resources or assets. Tangible assets include plant, equipment and even human resources, whereas intangible assets include things like  trade secrets  and  corporate reputation . VRIO Resources that are valuable, rare, and difficult to imitate or substitute are considered to be sources of sustained

Human capital theory was developed by Dr. Gary Becker, an American economist at the University of Chicago, and others. According to Becker (1994), human capital is different kind of capital from physical and financial resources.    Education, technology and etiquette training, and health expenditures are capital too because they improve wellbeing, health, earnings, and appreciation. Expenditures on education, training, and health care are investments in human capital. Human capital also refers to an individual or group’s stock of knowledge, routines, personality characteristics and social habits. Human capital even includes creativity that can be usefully applied to an economic purpose, and thus is considered to be a type of wealth. Countries, organizations, and groups with greater human capital are expected to be better able to accomplish goals to bring about economic improvement. Several studies have found a positive association between human capital and economic development, in

Agency theory was developed in the 1980s by economist Michael C. Jensen at the Harvard Business School for the purposes of explaining and predicting the behaviors of investors and managers. Agency theory distinguishes between principals and agents, the former being parties that delegate responsibility for some set of actions to the latter. For instance, entrepreneurs and managers are often the agents of investors, who delegate the responsibility over a business organization. The theory’s underlying assumption is that both parties are self-interested and that the interests of principals and agents diverge or are in conflict. Therefore, agents may make decisions on behalf of principals that are not in the principals’ interests, which is called an agency problem. For instance, agents may take greater risks than principals would want them too because agents are betting with the principals’ capital. Agency problems are exacerbated when there is information asymmetry between pri

Bricolage theory is credited to Levi-Strauss (1962) who was a French anthropologist who introduced the concept of bricolage entrepreneurship as he tried to show that indigenous peoples were just as entrepreneurial as “civilized” peoples. He compared the “bricoleur” to the “engineer” in his book unfortunately entitled The Savage Mind . Unlike the engineer, the bricoleur “makes do” with the inputs "at hand" to concoct whatever process needed to accomplish a particular project as it develops. By contrast, the engineer plans ahead, gains access to all that is needed to complete a project before starting. Thus, the bricoleur is seen as contrasting with the rational view as projects are accomplished by solving problems as they emerge, with whatever is available rather than what is really needed. The bricoleur practices radical experimentation rather than planning ahead. Bricolage theory is mainly focused on explaining how entrepreneurship emerges in economically depressed,

What is the effectuation theory of entrepreneurship? Dr. Saras Sarasvathy is an Indian born business school professor researching strategy, entrepreneurship and business ethics, currently appointed at the University of Virginia. Sarasvathy proposed the theory of effectuation in the early 2000s after studying a sample of expert entrepreneurs with diverse backgrounds. Effectuation theory is often considered a process theory because it explains the process that entrepreneurs use to create new ventures. Effectuation theory stems from the way that expert entrepreneurs think about problems and how they go about solving them. Effectuation logic contrasts with what Sarasvathy calls "causation theories" of entrepreneurship, where it is proposed that entrepreneurs start with a goal and then acquire the resources needed to achieve the goal, in a linear fashion. Each resource acquisition is a step toward the goal. In stark contrast, effectuation logic involves evaluating resourc

William J. Baumol was an American economist at New York University. His theory of entrepreneurship starts with the assumption that every society is endowed with their share of entrepreneurs. However, the way in which entrepreneurs use their energies depends upon the institutions—the rules of the game—in place in a given society. It is also sometimes called a political theory because the regime in a given country or territory may have tremendous influence on incentives. He argues that entrepreneurs may engage in productive (i.e., innovation) or unproductive (rent-seeking and crime) forms of entrepreneurship depending on what a country’s institutions encourage. Baumol argued that the notion of a "spirit of entrepreneurship" is largely useless for policymakers because it is difficult to measure and even more difficult to influence. Instead, Baumol proposed that policymakers should focus on altering the rules of the game to encourage productive entrepreneurship and discourage

What is the withdrawal of status respect theory of entrepreneurship? Everett E. Hagen was a political scientist and economist writing at MIT in the 1950s and 1960s. He sought to explain how traditional societies changed into those with continual technological progress and hence rising incomes. Here we discuss Hagen's (1963) theory of entrepreneurship. Hagen argues that a process eventually leading to entrepreneurship is triggered when a social group loses status in relation to other groups in a society. When members of a given social group perceive that they are given their due respected by the dominant groups in society, it triggers a creative spark that encourages entrepreneurial behaviors (Dana, 1995). Some examples of "withdrawal of status respect" include when: 1) a formerly higher status group is displaced by a new group; 2) a social group's symbols are insulted by the dominant group; 3) a group's symbols become unaligned with their actual economic

Max Weber was a German sociologist writing in the early 1900s who theorized that religious beliefs are a key determinant of entrepreneurial development. He argued that entrepreneurial energies are driven by beliefs about causes and consequences. In particular, he emphasized how religions encourage investment in economic growth and development (and compound interest). A religious belief in saving for the future was key, he believed, to the capitalistic spirit . Weber distinguished between religions that encourage capitalism from those that do not. In particular, Weber noted that Hinduism, Buddhism and Islam may not be conducive to entrepreneurship. Hinduism and Buddhism purportedly have a focus on the present moment and tend to shun materialism, making them problematic to the pursuit of entrepreneurial goals. He suggested that Islam’s focus on the rewards of the afterlife make material accumulation problematic.    By contrast, he argued that the protestant work ethic prevalent in

Frank Hyneman Knight, an American economist at the University of Chicago, developed the uncertainty-bearing theory in the 1920s to explain the phenomenon of entrepreneurship. The Roaring 20s The roaring 20s brought with them renewed attention to the people and processes that served to bring innovations to market with increasing intensity, and the media of the day was in the habit of idealizing business tycoons. Much of the government had adopted a laissez-faire attitude toward business. Knight distinguished between risk that can be modeled probabilistically, from uncertainty, for which the probabilities are unknowable. For instance, uncertainty surrounds the implementation of new strategies, the development of new products or entry into new markets. Similarly, the positive consequences of acquiring a competitor may have unknowable probabilities. According to his theory, bearing business uncertainty creates profit and the more uncertainty taken on, the more profit can be gained. The rel

Joseph Schumpeter, a prominent economist, is widely recognized as a pioneer in the field of entrepreneurship. He placed human actors at the center of economic development processes and argued that entrepreneurs played a critical role in driving innovation and economic growth. Schumpeter's view of entrepreneurship was unique in that he saw it as a disruptive force that challenged the status quo and led to the creation of new markets and industries. He believed that entrepreneurs were not simply passive actors responding to market forces, but were active agents who sought to gain power through their ability to resist social pressure and overcome limitations in existing skill sets. According to Schumpeter, entrepreneurs played a key role in driving the process of "creative destruction." This process involved the destruction of established industries and the creation of new ones through the introduction of innovative products, services, and production methods. Entrepreneurs