Entrepreneurship Theories

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 as th

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