INTRODUCTION TO ENTREPRENEURSHIP - Central …...Introduction to Entrepreneurship Theorising Entrepreneurship In this initial Part A of the Introduction to Entrepreneurship, we will

Entrepreneurship courses in Tbilisi State University – Part A

University of Piraeus • May 2007 0

INTRODUCTION TO ENTREPRENEURSHIP

PART A:

THEORISING ENTREPRENEURSHIP

The Background of the Entrepreneurial Activity

Joseph Hassid Alexios-Stefanos Komselis

May 2007



Table of Contents

Table of Contents.............................................................................................1

Foreword..........................................................................................................3

Introduction to Entrepreneurship – Theorising Entrepreneurship ....................4

1. Approaches to Entrepreneurship..............................................................5

1.1 Economics ..........................................................................................6

1.1.1 Arbitrage and uncertainty .............................................................6

1.1.2 Co-ordination of the production factors ........................................8

1.1.3 Innovation.....................................................................................8

1.1.4 Skill Differentiation........................................................................9

1.1.5 Career Mobility ...........................................................................10

1.1.6 A Final View of Economic Theories............................................11

1.2 Psychology .......................................................................................12

1.2.1 The need for achievement..........................................................12

1.2.2 Internal Locus of Control ............................................................13

1.2.3 Risk Taking Propensity...............................................................14

1.2.4 Tolerance of Ambiguity...............................................................14

1.2.5 “Type A” Behaviour ....................................................................14

1.2.6 Criminal Propensity ....................................................................14

1.2.7 Independence and Job Satisfaction ...........................................15

1.2.8 Over-Optimism ...........................................................................15

1.2.9 Criticism of the Psychological Traits Approach ..........................17

1.3 Personal, Family and Social Issues ..................................................18

1.3.1 Marriage .....................................................................................18

1.3.2 Health and Disability...................................................................19

1.3.3 Age, Education and Experience .................................................19

1.3.4 Family.........................................................................................21

1.3.5 Unemployment ...........................................................................22

1.3.6 Regionality .................................................................................23

1.3.7 Immigration and Ethnic Minority .................................................23

1.3.8 Female Entrepreneurship...........................................................25

1.4 Macroeconomic Factors....................................................................28

1.4.1 Economic Development .............................................................28

1.4.2 Industrial Structure .....................................................................28



1.4.3 Government Policy .....................................................................29

1.5 A Final Look at the Entrepreneur ......................................................31

2. Introduction to the Entrepreneurial Process ...........................................39

2.1 The Drive behind Entrepreneurial Change........................................39

2.2 The Entrepreneurial Process ............................................................40

2.3 The Entrepreneurial Mindset.............................................................42

3. Entrepreneurship “of need” vs. “of opportunity” ......................................45

4. Serial Entrepreneurship..........................................................................48

5. Entrepreneurial Networks .......................................................................51

6. Intrapreneurship and Innovation.............................................................56

7. Small and Medium Enterprises...............................................................60

7.1 Definition...........................................................................................60

7.2 SME Importance and Survival ..........................................................63

7.3 The Difference between Entrepreneurship and SME Management..65

8. Future Challenges for Entrepreneurship Research ................................70

Part A Bibliography and Further Reading ......................................................73



Foreword

There are good arguments to support the rapid increase in entrepreneurship

education. By stimulating young minds to embrace enterprise values a

dynamic and challenging mindset is encouraged. It is believed that enterprise

education will greatly contribute to increasing learners; motivation and to

making the school system more attractive, relevant and effective.

The above arguments are clearly sufficient to justify the introduction of

Entrepreneurship courses in higher education institutions – and even to lower

levels of the educational systems – especially in countries where the

economic system is undergoing changes and is directed towards “market

economy” operation.

The University of Piraeus has a long tradition and expertise in designing such

courses and in delivering entrepreneurship – related educational material.

With the generous support of the Government of Greece (Ministry of Foreign

Affairs – Hellenic Aid programme) and the cooperation of the State University

of Tbilisi in Georgia, it became possible for a Course in Entrepreneurship to

be introduced.

The manual in hand constitutes part of the educational material to be

delivered. It is planned that this will be supplemented with other materials

which will stimulate student’s class work, facilitate interaction and promote

better comprehension of both theoretical issues and practical dimensions of

entrepreneurship.

It is hoped that, with the cooperation of local TSU partners, the support of the

University’s Administration and the active contribution of the students

themselves, the course will achieve its objectives and secure its sustainability.

Professor Joseph Hassid

Project Coordinator



Introduction to Entrepreneurship

Theorising Entrepreneurship

In this initial Part A of the Introduction to Entrepreneurship, we will go through

the main concepts and ideas that have been formulated by academics and

researchers. Initial and seminal input from the previous centuries, and

contemporary theory will provide the background to the practical application of

entrepreneurship within the modern economies and markets. So, theories

from the fields of economics and psychology, and several other factors that

have been related to entrepreneurship are presented below. The scope is to

gain an overall understanding of the entrepreneurial process and better

understand the modern theory and practice.

However, before we go into the theories and issues regarding

entrepreneurship, we need to offer a definition of the term. The word

entrepreneur is of French origin and literally means the person that takes

between – the middleman; in a more free translation, the individual who

pursues a commercial activity. As Bruyat and Julien (2001) point out, defining

entrepreneurship is still a major dispute among researchers and the word

entrepreneur still has no common meaning among the academic community.

There are several approaches to this issue, which come from different view

points and have their roots within the theory that each scholar adopts as the

basis for his or her research. The explanation and presentation of the various

streams that dominate the definition debate is not within the spectrum of this

work. Anyone interested in studying the lively dialogue on this issue can refer

to some of the many papers that deal with it. So, we will adopt a very broad

definition for entrepreneurship that incorporates b usiness owners and

self employed individuals. Also, as explained further below, individuals that

exhibit entrepreneurial behaviour while being employed (what is called

intrapreneurship) are included in our definition. Finally, the only distinction that

holds in this work is the distinction between Small and Medium Business

Management and Entrepreneurship. The latter, includes the notion of growth

and business development, while the former only describes how to run a

business.



1. Approaches to Entrepreneurship

Theories that are dealing with entrepreneurship come mainly from three

different disciplines of research: economics, psychology and sociology .

Economists look into the effect of entrepreneurship on and the role of the

entrepreneur in economic development, as well as application of economic

and growth theories within the entrepreneurial context. Psychologists have

been interested in identifying the personal characteristics and traits of

entrepreneurs. Sociologists have been looking into behavioural aspects of the

entrepreneurial personality and its interaction with other social constructs. All

of these approaches to entrepreneurship help us understand the way it works

and how entrepreneurs behave. However, theories on entrepreneurship that

come form psychology and sociology are sometimes questionable and

controversial, and the reader must therefore use them to understand rather

than define the entrepreneur. Finally, nowadays, research on

entrepreneurship has been established as a distinctive field for scholars to

search, formulate and propose new theories.

The focus on entrepreneurship is attributed to the importance of Small and

Medium Enterprises (SMEs) for national economic growth and labour

creation. In order to have growth within the SME sector, entrepreneurs are

needed to run businesses and demonstrate their capabilities. SMEs have

Learning Objectives:

After having read chapter 1.1 you should be able to:

� Understand the key economic theories that have been developed

over the years in relation to entrepreneurship.

� Understand the psychological traits approach to the individual

entrepreneur.

� Understand the main issues related to personal, family and social

status in relation to entrepreneurship.

� Understand other macroeconomic factors that influence

entrepreneurship.

� Differentiate between the theoretical approaches to

entrepreneurship and critically assess their contribution to the field.



become important to national economies lately – since the middle of the 20th

century – and thus research in this area is still young and ongoing. This fact

also explains why research on entrepreneurship has been left out by many of

the mainstream classical economic thinkers and only economists considered

outsiders in their times looked into it. And this brings us to the first evidence of

the entrepreneur in economic thinking.

1.1 Economics

Economic thinking in respect to entrepreneurship can be divided into two

eras . The early views of entrepreneurship include thinkers such as Cantillon,

Say, Schumpeter etc. Modern views include Kanbur, Lucas etc. Early

theories on entrepreneurship are more of concepts d elivered by

economic thinkers, while modern theories are presen ted by economists

on a more technocratic and scientific manner. Early economists, who

introduced the term entrepreneur in economic theory, mainly focused on four

different projectiles. Below you can find the main economists behind each

approach, not in chronological order, but categorised per approach. Modern

economic theories on entrepreneurship come from the neo-classical

microeconomics and they primarily try to look into the optimisation of the

choice between entrepreneurship and employment. They differ from early

views in mainly two ways. Firstly, they adopt Knight’s (1921) proposition that

people become entrepreneurs by choice. A choice that is based on the utility

maximising paradigm, meaning that people choose to be entrepreneurs over

paid employment when the expected return is greater. Secondly, modern

economic theories often assume that perfect competition exists in markets,

technology is given and all supplying market participants are price takers. This

is mainly done for reasons of simplicity. Further below the reader can find the

key contemporary approaches to entrepreneurship.

1.1.1 Arbitrage and uncertainty

The first one to introduce the word entrepreneur and highlight its importance

for economic growth was the French scholar Richard Cantillon (1755).

Cantillon proposed that entrepreneurs act as middlemen, buying at one point

and selling at another. They became important for the economic development

as private property rights became available to more people. Within this



process, entrepreneurs perform all exchanges and bear the risk of buying at

certain prices and selling at uncertain ones . Hence, a Cantillon’s

entrepreneur is anyone who has uncertain income. So, successful

entrepreneurs are important to the economy, since they alleviate economic

paralysis caused by uncertainty and risk. His approach implies that same

doctrine behind Darwin’s evolution theory; only the fittest will survive.

Unsuccessful entrepreneurs are therefore going to fail and the risk taken will

force them out of business. The key role of Cantillon’s entrepreneur is not that

of an innovator, but rather that of a profit seeking person. Perception,

intelligence and risk taking help him bring together the two ends of a market.

So, entrepreneurs will enter a market if profits persist and the amount of

income is relative to the risk embedded in the specific market’s transactions.

Kirzner (1973, 1985) developed Cantillon’s thoughts looking into the

middleman role of the entrepreneur. In his view, the entrepreneur sees and

exploits an opportunity that is there for everyone to see. Therefore,

successful entrepreneurs have an increased level of alertness and manage to

notice what other market players oversee. Kirzner’s entrepreneur gains on

imperfect knowledge, meaning that he has some additional knowledge that

differentiates him form others. This knowledge comes from costless

information, the mere identification of something that has always been there.

Knight (1921) focused on Cantillon’s entrepreneur in respect to uncertainty.

Entrepreneurial uncertainty stems from unknown avai lability of natural

resources, technological change and price changes. Profits are uncertain,

although input prices are given. Therefore entrepreneurs need to be self-

confident, judgemental, venturesome, posses the ability to foresee and lucky.

Knight suggested that the choice of becoming an entrepreneur rather than a

worker is dependent on the rewards relative to the uncertainty in each sector.

So, entrepreneurs are not born but are opportunistic individuals that either

turn to become entrepreneurs or paid employees, depending on the profit

making possibilities of market relative to the inherent risk.



1.1.2 Co-ordination of the production factors

The second approach towards understanding the entrepreneur was initiated

by Jean-Baptiste Say (1828). Say proposed that central to the entrepreneur’s

role in the economy is the combination and co-ordination of the factors of

production . He or she sits at the middle of the economic system and its

market, directing and rewarding the various factors of production, and

receives the difference between sales and cost as his profit. The factors of

production are materials, people, information and capital. Within these factors,

Say includes personal characteristics such as experience, judgement and

perseverance that are considered to be scarce. Therefore, entrepreneurs,

who simultaneously posses these characteristics, will be successful. Another

key issue regarding Say’s approach is the ability of the entrepreneur to

overcome difficulties, solve unexpected problems, and exploit existing

knowledge. Several scholars, such as Hebert and Link (1988), have criticised

Say and his entrepreneur as being nothing more than a skilled worker with

managerial capabilities. Others, such as Casson (1982), have pursued this

route and offer more contemporary insight into Say’s entrepreneur.

1.1.3 Innovation

Only in the early 20th century did Josef Schumpeter (1934, 1939) introduce

innovation to the literature on entrepreneurship. Schumpeter’s entrepreneur

operates outside conventional technology and introduces significant changes

to the production process, rather than small improvements. So, the

entrepreneur either does new things or does things that are already

being done in a completely new way . According to Schumpeter this

involves:

• new product creation,

• new production method,

• new market opening,

• new source of supply capturing, or

• new industry organising.

In his view, the entrepreneur is an exploiter (similar to Say) and his actions

are responsible for shifts within business cycles and economic development.

Schumpeter will be remembered for his term “creative destruction” that



depicts the entrepreneurial activity. A wave of innovation hits the market,

discards traditional products and processes, and is followed by imitation on

behalf of the competition. This will lead to a new point of equilibrium. This

means that entrepreneurial profit is limited to a specific time interval, within

which the market is unstable and the entrepreneur maximises profits, unless

the entrepreneur continues to innovate. As far as personality is concerned,

Schumpeter viewed the entrepreneur as a unique personality, an unusual

creature who relies on instinct rather than calculations. He also argued that

profit is a residual and not a return for being a production factor, and that

entrepreneurs are never risk bearers compared to capitalists who are. His

latter point has been heavily criticised by modern scholars, mainly for the

distinction between capitalists and entrepreneurs.

1.1.4 Skill Differentiation

Casson (1982) is the most prominent modern economist, who attempted to

approach entrepreneurship by combining former economic literature. His

theory is mainly twofold. Initially, Casson sees the entrepreneur as an

individual who co-ordinates production resources and, in order to do this

effectively, possesses extraordinary skills. These skills help the entrepreneur

to put in use the limited resources and produce an output that is unique,

based on his or her abilities. The backbone of the Cassonian entrepreneurial

process is the decision making process that reallocates resources. So, the

entrepreneur needs to be able to have power over and manage resources,

and, therefore, needs capital. In Casson’s view, regional differentiations in

entrepreneurial activity relate to personal wealth (such as home ownership).

Secondly, Casson believes that change is the companion of

entrepreneurship . To support this theory, he describes a situation where

demand and supply for entrepreneurs is similar to the demand and supply

curve of perfect competition markets. As expected rewards for entrepreneurial

activity increase, the number of entrepreneurs increase, while the lower the

reward the higher the demand for change agents (i.e. entrepreneurs) is. In his

work, entrepreneurs elicit change, and change elicits entrepreneurial

opportunities. So, the reader might comment that the most capable

entrepreneur will be the one who initially sees the expected rewards, while

others are still ‘blindfolded’.



1.1.5 Career Mobility

In modern econometric thinking, theories are being developed in order to

examine the actual choice of an individual to either become an entrepreneur

or an employee – the choice between self employment and paid employment.

There are two main streams of research, one that considers that all

individuals are the same – using the word homogeneous – and the other

one that people are different – using the word heterogeneous. The approach

that considers all workers to be the same and possess similar characteristics,

has modelled several propositions that are rather advanced and detailed. In

general, the main focus of this approach is to understand when people

choose to become self employed over being employees relative to factors

such as income, risk, risk aversion and the equilibrium number of

entrepreneurs in a specific market. The reader may find it interesting to look

into some of these theories, as formulated by several researchers, such as

Appelbaum and Katz (1986), Kanbur (1979) and Sheshinski and Dreze

(1976). These models, however, consider – for reasons of simplicity – that

there is no cost in switching from one career choice to the other, while in

reality there are both direct financial and sunk costs innate in these decisions.

Moreover, mobility between paid employment and self employment is not as

straightforward within a real market place as it is considered in this model.

The reason that researchers have chosen this rather simplifying approach is

that they need to examine the mobility dynamics within the workforce, identify

key issues and then gradually move over to applied research. So, results are

still ambiguous and no clear explanations have been given by such models.

However, there have been attempts to incorporate career mobility cost within

these models, for example by Dixit and Rob (1994) and Parker (1997).

The second approach, the one that considers people to be different in matters

such as their ‘entrepreneurial ability’, builds on the early economic theories of

entrepreneurship. Casson – as described above – can be considered as the

modern economists that brings together these streams of thought. The key

theorist behind the heterogeneous model of entrepreneurship in modern

economics is Lucas (1978). Lucas developed two sub-models, one static,

where all is equal apart from individual managerial/entrepreneurial abilities,

and one dynamic, where firm size is considered differentiated and variable.



Lucas’s static model shows that there are three types of workers,

entrepreneurs, marginal entrepreneurs and paid employees. Within this model

it is assumed that more able entrepreneurs run larger businesses. His

dynamic model proposes that when it is less likely to have more

entrepreneurs, increases in per capita capital decrease the number of

entrepreneurs and increase the firm size. For his latter model, evidence is not

straightforward and, thus, many economists have attempted to expand it and

reach conclusions.

1.1.6 A Final View of Economic Theories

As a final comment, it is essential to stress out that economists have shifted

their focus from a theory building process to detailed analysis of

econometric models . Historically, the initial economic thought on

entrepreneurship came form unconventional thinkers, such as Schumpeter,

who were not accepted by their peers. This non-mainstream output, that

opened economics to the fields of psychology and business, is now the

groundwork for highly theoretical models.



1.2 Psychology

Many psychologists have devoted their research activities to the entrepreneur.

Obviously, psychologists are not looking into economic paramet ers or

the contribution of the entrepreneur to the society , but focus on

understanding and describing the person that choose s to become one .

During recent years, economists have started to include in their research

parameters from the psychological school on entrepreneurship, in order to do

cross-discipline tests on entrepreneurial and self-employment models.

There are four key personal traits that have attracted the attention of the

psychologist, as outlined by Amit, Glostein and Muller (1993). These traits are

the first four ones that follow and are linked to the entrepreneur in a way that

entrepreneurial activity can be explained, along with the choice to bear risk.

Since the list of personal characteristics that have been looked into by

academics is much longer; further elements of the psychological approach to

entrepreneurship are listed below.

1.2.1 The need for achievement

In 1961 David McClelland presented one of the first systematic approaches

towards understanding the entrepreneurial personality. In his work he

attempted to provide an entrepreneurial profile; the same thing that most

psychologists tried to produce. So, in his seminal work McClelland introduced

the ‘business heroes’ , entrepreneurs that inspire younger generations and

promote the essentiality of entrepreneurial activity. In this direction, he

identified the key characteristic of the entrepreneur to be the ‘need for

achievement’ , rather than the desire to make money. He labelled this need

for achievement as “n-Ach” and derived a tool with which one can measure it.

He argued that societies with a higher measure of n-Ach on the average

produce more active entrepreneurs – and, thus, faster economic growth –

than societies with lower n-Ach on the average. People with high scores of n-

Ach will seek independence and will pursuit more difficult tasks to undertake.

Sources of higher n-Ach include:

• Parents who encouraged independence in childhood.

• Praise and rewards for success.

• Association of achievement with positive feelings.

http://en.wikipedia.org/wiki/Childhood



• Association of achievement with one's own competence and effort, not

luck.

• A desire to be effective or challenged.

• Interpersonal strength.

So, according to McClelland, the most satisfying thing for the

entrepreneur is the recognition of the success, and not the success per

se. He also introduced two other measures, n-Aff (for ‘Need for Affiliation’)

and n-Pow (for ‘Need for Power’), which have further contributed to the

understanding of human action and interaction. In general, apart from being

high achievers, McClelland described entrepreneurs as individuals that are

inclined to:

• be proactive and committed to others,

• take personal responsibility for their decisions,

• prefer decisions with moderate amount of risk,

• crave feedback on their performance, and

• dislike repetition and routine.

1.2.2 Internal Locus of Control

Another psychological view of the entrepreneur suggests that individuals that

choose entrepreneurship over paid work have the innate belief that their

performance is a result of their own actions, rather than other peoples’

activities or external factors. This is called in psychology ‘internal locus of

control’ – meaning that the centre of control lies inside the person, rathe r

in someone else’s or fates hands . Therefore, it has been argued that

people with an internal locus of control will choose self-employment over

dependent employment. Rotter in 1982 derived a tool to determine the

location of an individual’s locus of control. This metric scale helped in the

direction of empirical tests regarding this theory. However, different studies

using the Rotter Scale give us differentiated results, and the internal locus of

control theory is therefore considered to be controversial.



1.2.3 Risk Taking Propensity

Entrepreneurs are considered to be individuals with less risk aversion than

the ones that choose employment. The key element of this entrepreneurial

trait is the difference between the attitude towards risk and the actual or

perceived level of risk. So, entrepreneurial behaviour is directed by both the

individual’s attitude towards risk taking and his or her understanding of the

complex business environment.

1.2.4 Tolerance of Ambiguity

Furthermore, Entrepreneurs are described by scholars – such as Timmons in

1976 – as individuals that, compared to others, can better handle complex

and unstable working environments . This means, that people who chose

self-employment over paid employment, are comfortable in venturing within

unstable and dynamic business circumstances.

1.2.5 “Type A” Behaviour

Entrepreneurs demonstrate behaviour characterised by aggression,

competitiveness, striving for achievement and impatience (Boyd , 1984).

1.2.6 Criminal Propensity

This stream of theory claims that entrepreneurs are people that don’t fit in

with the rest of the society . They are described as misfits or displaced

individuals that operate far from the societal mainstream. Moreover,

entrepreneurs are considered to be capable of illegal activities and criminal

behaviour (Shapero , 1975; Kets de Vries , 1977). The latter proposed in his

work that problems regarding an individual’s childhood make it difficult for him

or her to accept authority or work within teams. Hence, they start out on their

own and try to increase their self-esteem, which is considered to be low along

with the individual’s self-confidence. This theory has been very intriguing for

researchers and many have tried to identify empirical evidence. However,

although several studies – both psychological and econometrical – have

located empirical findings that back this proposition, other surveys have

managed to negate this theory.



1.2.7 Independence and Job Satisfaction

Another significant issue surrounding the entrepreneurial personality is the

most attractive characteristic of self-employment, independence. The self-

employed individual can arrange time and effort to suit ones own needs

and expectations. This is commonly called ‘being ones own boss’. This

notion goes back to Knight (1921), but non economists have also focused on

it. Recent economic studies have been looking into why individuals remain

self-employed, although they could be earning more if working for someone

else. Hence, the term job satisfaction is introduced, which is not always

related to pay and includes other sources of satisfaction that are unique to

each individual. So, studies have shown that self-employed individuals and

entrepreneurs consider that important work related issues, such as initiative

and the work itself are more significant than pay and security (Taylor, 1996).

However, other studies showed that job satisfaction is not necessarily related

to overall satisfaction, since the self-employed work longer hours and are

solely responsible for any problems of their work (Parasuraman and Simmers,

2001). So, job satisfaction appears to come at a cost that has to do with work

related and personal life induced stress, which is on its own a reason to

choose paid employment over becoming an entrepreneur. Ultimately

therefore, independence is a key variable in the choice of employment status.

1.2.8 Over-Optimism

Psychology has been looking intensely into individuals that appear to be

over optimistic, especially about situations that a re not completely

under their control . Entrepreneurs appear to be systematically over-

optimistic, compared to other people within the same market. Several scholars

have tried to establish over-optimism as the key feature of the entrepreneur,

the feature that can explain all other essential psychological traits of such

people and definitely the one of risk attitude. Cooper, Woo and Dunkleberg

(1988) identified within their sample of entrepreneurs what they called

‘entrepreneurial euphoria’ , namely the belief of entrepreneurs that their

chance of succeeding is much higher than the one of others in the same

market. However, subsequent studies showed that over-optimism is not only

present within the community of the self employed, but also within the one of

paid employees. Therefore, over-optimism is considered to be more of a



cultural tendency, rather than a personal trait (Arabsheibani et al., 2000). In

this study though, it was identified that entrepreneurs were systematically

more over-optimistic than paid employees. Hence, it could be concluded that

in an over-optimistic society, individuals that choose self-employment over

other wealth creating options will belong to the group that has the highest

optimism rates.

A question that economists have been trying to answer is how is it possible for

over-optimism to dominate the market, taken into account that over-optimism

deviates from rational economic behaviour – especially in terms of

maximising returns. So, although it is rationally expected that realists will

dominate in the market, while over-optimists will not sustain, there are several

reasons to claim the irrational:

• When the returns of entrepreneurial activity become equal to the ones

produced by paid employment, realists will choose to work for someone

else, while over-optimistic individuals will remain in the entrepreneurial

arena (de Meza and Southey, 1996).

• Over-optimists will work harder and save money in cases of failure, in

order to compensate for problems that arise from their skewed belief of

the market (Manove, 2000).

• Over-optimistic individuals will hardly copy business practices that are

existent in the market. They will probably follow what they consider to

be innovative and, in order to find that, they will feel confident to

explore their environment. So, they are highly probable to access

information that might offer a competitive advantage (Bernardo and

Welch, 2001).

• Over-optimism might inspire outsiders – such as investors, customers

and suppliers – through high self esteem, incorporating ambition and

potential.

So, as mentioned previously, over-optimism as a personal or cultural trait can

be the background for all the previously mentioned entrepreneurial

characteristics that psychologists have attempted to sketch, in order to obtain

the entrepreneurial ‘DNA’.



1.2.9 Criticism of the Psychological Traits Approach

The psychological traits theory of entrepreneurship attempts to outline the

profile of the individual entrepreneur, by identifying specific areas in which he

or she differs from the rest of the society. So, this approach has received

broader criticism, mainly because theories have been formulated over the

years, but no unique set of characteristics has bee n outlined . The main

stream of criticism relies in the fact that even under the assumption of an

entrepreneurial personality, market factors and universal circumstances also

play such a significant role in the entrepreneurial activity that one cannot

attribute success or failure to one specific personality type. Also, it is being

argued that this approach to entrepreneurship seems to be personifying all the

desirable characteristics of the ideal businessperson (Kaufmann and Dant,

1998). So, although this stream of theory offers great insight and

understanding of the various personal aspects of entrepreneurship, it is

agreed that psychological factors are not sufficient (or even necessary)

conditions to explain economic activity by the self employed and

entrepreneurial individuals.



1.3 Personal, Family and Social Issues

Apart from the economic and psychological theories, one can make various

assumptions about individuals that choose self employment and

entrepreneurial activities as a career path. These assumptions have been

formulated – mainly by sociologists – and looked into by researchers to

identify correlations and trends. The ones that follow are by no means

exhaustive, but represent the major concepts of personal and interpersonal

circumstances

1.3.1 Marriage

Theoretically, it is argued that entrepreneurs are more likely to be married

than not married, mainly for five reasons:

1. The wife or husband can contribute capital for the start-up or expansion

of a business. Capital that is informal and may even come from the

spouse’s family, without the usual expectations that investors may have

regarding the return on their capital.

2. A key element of family businesses, and thus businesses of people that

are married, is that the family provides cheap or free labour, below

market rates, in order to suit the needs of a growing business. On the

other hand, the income of the non-entrepreneurial spouse is often

regarded as the safety net that will protect the family from financial

problems in case the entrepreneurial activity suffers under temporary or

long term problems.

3. Since entrepreneurial activity embodies stress, spouses may offer

emotional support and help overcome frustration.

4. Being married offers in many economies benefits regarding taxation.

5. In general, entrepreneurs are older in age and older members of the

society tend to be married.

Of course, there are also some contradicting theories, of which the major one

suggests that married couples with children will probably opt for guaranteed

and stable income, rather than risky entrepreneurial opportunities.

In general, studies have demonstrated that there is a positive correlation

between entrepreneurial activity and marital status.



1.3.2 Health and Disability

It has been argued that people who need to build their career around a

significant personal issue, such as long term healt h problems and

disabilities (physical or mental), will choose self employment . This is

because they can set up their daily schedule taking into account specific

restrictions of time, place and activity. Also, in certain societies, employer

discrimination regarding health and disability might be that dominant in the

market, that people suffering from illnesses or having visible disabilities might

be excluded from it. It is also notable that government policies (especially in

the European Union) which aim at alleviating such discrimination, focus both

on employer benefits when hiring disabled individuals and self-employment

subsidies for people with adequate or specialised knowledge.

On the other hand, it has been shown that self employment can be

demanding in time and effort, and thus a growth oriented entrepreneurial

activity might be the wrong choice for individuals that face physical or mental

constraints. Moreover, health problems and disabilities might force the

individual to pause his or her career for extended time intervals and put

significant amount of money in dealing with health issues associated with their

condition. Self-employed people have to take care of themselves, while

employees are taken care of the employer and the public social and health

systems.

Studies have not managed to demonstrate a specific correlation between ill

health or disability and entrepreneurship. An explanation might be that self

employment and entrepreneurial activity, under these personal health

circumstances, might be different among several industries and varying

disabilities.

1.3.3 Age, Education and Experience

As with marital status discussed previously, older and/or more experienced

individuals are likely to become entrepreneurs , because:

1. The higher the age of an individual, the more likely he or she will have

developed an adequate network of other individuals that will supply

resources for the entrepreneurial activity. Moreover, through these



networks, entrepreneurial opportunities become identifiable and

accessible.

2. It is expected that as a person grows older, capital is accrued that can

be used to finance and support a start up. Such capital, both in the

form of money as well as intangibles (knowledge, experience, networks

etc), comes from personal work, relation to other people and

inheritance. Many entrepreneurs have been recorder to kick off their

career as employees, and to switch to self employment later on.

3. In cases of mandatory retirement, early retirement schemes or

downsizing, older people are keener on using self employment as a

way out.

4. Retired individuals might not want to stop working, for both personal

and financial reasons. Therefore, as they don’t have the physical

endurance or mental ability required for employment, they might

choose self employment, in order to set the pace and personally

manage working hours.

On the other hand, older individuals might be less risky and willing to pursuit

entrepreneurial opportunities, than younger ones. Moreover, as high potential

entrepreneurial activities require long hours and increase work related stress,

older individuals might not be able to cope under such conditions. So, several

descriptive studies across the globe show that self employment (and mainly

start ups) is situated under normal circumstances around the midlife of the

workforce. Also, there appears to be a difference among the willingn ess

to become self employed and actually becoming self employed .

Blanchflower, Oswald and Stutzer (2001), identify that the interest in self

employment decreases as age increases, as the actual self employed

increase as age increases. However, a key issue regarding this approach to

entrepreneurship is how one describes and measures experience, as it is not

straight forward that experience is linked to age. As far as experience is

concerned, it has been identified that previous self employment experience

(even failure) is positively correlated to the willingness to pursuit self

employment later on in life.

The counterpart of experience, education, appears to have an ambiguous



relation with entrepreneurial activity, too. If one considers education as an

investment, it is obvious that the more an individual invests in his or her

education that more returns will be expected. Although entrepreneurial activity

might offer significant returns, these will probably come after several years of

low income. On the other hand, well educated employees will probably start

off their career with higher salaries and will experience the return on their

investment much faster. However, better educated individuals will have better

market information and will be able to identify business opportunities.

Moreover, educated professionals and highly skilled craftsmen are more likely

to be able to support a self employment activity, through the uniqueness of

their learned skills. However, it is not said that within formal education (no

matter how high the level) the individual will receive the necessary knowledge

to pursuit and manage an entrepreneurial venture. Hence, although many

scientists develop new products through research within their education, they

usually associate themselves with businesspeople in order to market the

product. It is also notable, that entrepreneurs from older times are rather

different in education from the modern ones. Entrepreneurs that established

their businesses sometime in the middle of the 20th century (especially in

Europe after World War II) are sometimes not educated at all or have intense

education regarding their craft. On the other hand, modern growth oriented

entrepreneurs have invested time and effort in their education and also try to

gain the necessary business knowledge, in order to run their business. In

general, studies display contradictory results and a direct relation between

education and entrepreneurial activity is not identified. The findings appear to

be industry specific.

1.3.4 Family

The family as a social construct is the channel through which society passes

its values, beliefs and overall cultural elements on to its younger members.

Apart from the societal value system, family is argued to offer role models and

secondary experience to the children. Parents, grand parents and close

relatives demonstrate through their life choices the effects and results of

choices. Hence, the role of family in entrepreneurship appears to be crucial, in

that it transfers from one generation to the other expli cit experiences

regarding work ethics and career choices . One could identify two key



elements that incorporate the transfer of experiential learning, parental self

employment experience and business success (Dunn and Holtz-Eakin, 2000).

So, if one could argue that entrepreneurship runs in the family, it is highly

probable that the experience the parents made with self employment was

positive and inspired the children, offering a promising and rewarding goal. On

the other hand, negative entrepreneurial experience (not necessarily finance

related, but also possible negative effects on the family life and the individual

health), might drive the children away from the self employment career option.

In general, self employed parents offer their children a broad spectrum of

business management knowledge, capital management and the

understanding of risk. This informal schooling might not even be planned, but

incorporated in the family life through activities such as the Sunday family

dinner. Moreover, if a business exists in the family that might be passed on to

the next generation, children are more inclined to self employment and might

strive to prove their ability to inherit the family business. Finally, the existence

of a successful business in the family, might secure the essential capital

needed to start a new venture by the children.

1.3.5 Unemployment

Research on entrepreneurship has been looking for a correlation between

unemployment and entrepreneurial activity. Considering unemployment, it is

important to differentiate between structural unemployment that comes from

major changes in an economy’s industry and frictional unemployment that

includes those individuals that are between jobs. Governmental policies have

been attempting to reduce structural unemployment by offering subsidies for

and supporting self employment, and fostering what is called the ‘enterprise

culture’ or the ‘entrepreneurial mindset’. On the other hand, other

governmental policies that include subsidies to business for employing

people, attempt to reduce frictional unemployment. Hence, it becomes clear

that unemployment rates are negatively correlated with entrepreneurial activity

and this is why governments need to intervene. It has been shown that being

unemployed does not mean that the individual will p ursuit a career in

self employment , especially when the social system offers significant support

to the unemployed and their families. The debate on the entrepreneurial



propensity of the unemployed is closely related to the one of entrepreneurship

of need relative to the one of opportunity, discussed further below in the text.

1.3.6 Regionality

A further point of interest for the scholar of entrepreneurship is that

entrepreneurial activity displays a regional variat ion . Even within cities,

some areas appear to be more entrepreneurial than others, wider

geographical areas have more per capita self employed and some countries

are more entrepreneurial than their neighbouring ones. Over time, several

answers have been offered to explain this phenomenon. These include the:

• level of workforce education,

• accessibility to resources and markets,

• tradition and role models, and

• availability of capital.

Moreover, it is essential to differentiate between rural and urban areas , since

in each of them different types of entrepreneurial activity are feasible,

especially when one takes into consideration the population movement from

rural to urban areas. This is also supported by governmental subsidy policy,

through which entrepreneurs in rural areas are entitled to more funds than

their urban competitors, in order to retain human capital in such areas.

1.3.7 Immigration and Ethnic Minority

Ethnic minority entrepreneurship is becoming day after day more important for

policy makers and researchers in the area of entrepreneurship. Immigrants

and ethnic groups within a society appear to behave differently in regard to

venturing than the main culture of the host country would suggest. For many

years ethnic groups have been forming minorities in the developed

economies, such as the USA, Australia and Germany, and nowadays a new

influx of immigrants is shaping a more diversified economic population in the

rest of the western and developing countries. Also, in most post-socialist

economies of Eastern Europe and Asia, due to population movements and

unclear turf dissemination, significant ethnic groups find themselves in now

independent countries. Hence, for Europe and all the developing countries

that are in the wider European and Asian continent, immigrants and ethnic



groups offer a significant input to the local and n ational economy .

Entrepreneurial theory assumes that immigrants and ethnic groups are

attracted to entrepreneurial activity as a way to economically advance and

avoid poverty (Sanders and Nee, 1996). Also, it is widely suggested that

immigrants and ethnic groups suffer under employment discrimination, both in

form of social discrimination and in form of the inability to work legally (many

financial immigrants reside illegally in the country that hosts them). As far as

an indication is concerned on where the current situation is leading, one might

look at the USA, where immigrants have been a key economic growth tool. In

this country, ethnic groups that belong to non-black groups – such as the

Chinese, Pakistani, Greeks, Italians – have self employment rates that exceed

the average of the total USA population. This however does not hold true for

all ethnic groups, and therefore the assumption can be made that self

employment propensity is related to the immigrants’ culture and level of

employment discrimination. In countries that ethnic minorities have become

an issue of importance recently, ethnic entrepreneurship takes mainly two

forms . The first one is related to services and overall entrepreneurial activity

that focuses on members of the ethnic group, such as food markets,

restaurants, telecommunication, money transfer systems, leisure and

entertainment, and other services. A possible explanation for this is the social

discrimination that ethnic groups face, which does not allow them to either find

products and services or take part in the daily activities of the host country’s

dominant culture. The second form deals with jobs and activities that the

members of the local workforce are not anymore willing to do. These jobs are

usually related to manual activities, such as builders, farmers, cleaners etc.

Also, specialised skills not found in the workforce of the host country, such as

cooks or translators, become a competitive edge for immigrants.

Economic literature refers to different types of factors against ethnic groups

that might affect both positively and negatively ethnic entrepreneurship:

• Employer discrimination.

• Access to capital discrimination.

• Consumer discrimination.

• Positive returns on entrepreneurship (relative to employment).



• Ethnic enclaves and geographical clusters where the specific ethnic

minority is denser than elsewhere.

• The entrepreneurial propensity of the culture of each ethnic group.

• The existence of role models.

Finally, it is suggested that immigrants are more likely to become

entrepreneurs compared to native workers, for the following reasons:

• Immigrants tend to be more educated than native workers, especially of

developed countries. Mainly because education in developing countries

is considered a way out of poverty.

• Immigrants have a secured market to sell their products and deliver

their services. Also, they have better access to ethnic resources and

social networks.

• Many immigrants intend to return to their home country after they have

accumulated some wealth, and entrepreneurial activity appears to be

the best way to achieve this goal.

• Immigrants face problems with cultural assimilation, communication,

discrimination and/or professional accreditation that is not valid in the

host country.

• Immigrants tend to be risk-takers, if taken into account that leaving their

home country is an action that involves itself high risk.

• In cases of illegal immigrants, self employment often avoids detection

by authorities.

• Immigrants tend to join occupations and industries that have

themselves high levels of self employment.

1.3.8 Female Entrepreneurship

It is generally accepted that differences exist in all societies on how male and

female workers earn their income. In employment, we often refer to the ‘glass

ceiling’ which does not allow women to achieve senior positions in a company,

in contrast to their male counterparts. Also, it is of common knowledge that

women tend to earn less than their male counterparts for similar jobs. The

same is valid for self employment. Fewer women are self employed and

entrepreneurially active than males. Also, women appear to be

entrepreneurially active mainly in the services sector, with some industries still



being dominated by males. So, female entrepreneurs are mainly focused on

sales, personal, financial and other services. On the contrary, female

entrepreneurs are not found in industries such as construction. In Europe,

rates of female entrepreneurship range from 20% in the UK to 40% in

Belgium. In most developed economies, female self-employment is increasing

rapidly and faster than male self employment. It is suggested that this has

both to do with societal acceptance of females as economic agents, as well as

the fact that developed economies tend to focus on service sector activities,

as they outsource more traditional ones. Hence, since female

entrepreneurship is higher within the services sector, moving from production

to services enhances their entrepreneurial potential, too.

Goffee and Scase (1987) published a research performed in the UK that

looked into the key differences between female and male entrepreneurship.

They suggest that there are two main influences on female entrepreneurship.

Firstly, they refer to entrepreneurial ideals , that incorporate the role of

women in the economy and which has been for many centuries a supportive

role to the choices of their partner. In this sense, women have been for

centuries domestically active and only in the last years have been allowed

social norms to earn money themselves. Secondly, female entrepreneurial

propensity is affected by the extent to which women themselves adhere to

conventional gender roles . These two parameters become of special

importance when imposed to different social and religious backgrounds. In

this direction, it is also essential to note that child care and household

activities are also related to females in modern societies and therefore affect

both the extent and scope of female entrepreneurial activity. In cases of heavy

household burden, self employment can be the solution for female workers

who cannot be full time employed.

As a final note on female entrepreneurship, it is of importance to underline the

fact that when measuring female entrepreneurs, one has to differentiate

between real and ‘dummy’ female self employment. By ‘dummy’ we refer to

the fact that in many countries, although the male partner is running the

business, as far as authorities are concerned the female partner is the owner.

This happens for a variety of reasons, such as taxes, legal aspects and social



security benefits. In many of these cases, women have no say in what relates

to the business and in some extreme ones, they even might be harmed

financially and personally by their husbands’ business choices.

In general, female entrepreneurs face following issues:

• Discrimination.

• Time flexibility (child care, household etc).

• Household contribution of the partner.

• Education potential and education barriers.

• Relative earnings and demand for female workers in the market.

• Less self employment income than their male counterparts (Aronson,

1991).



1.4 Macroeconomic Factors

Apart from the economic perspective, the psychological theory, and other

personal, family and social issues, there are some macroeconomic factors

influencing entrepreneurial activity. These factors differ from the preceding

ones through the fact that they are driven by man. Decisions on economic

development, industrial structure and government policy result from planned

human activity, and directly affect the parameters discussed in the personal,

family and social issues part.

1.4.1 Economic Development

Economists have been trying to relate economic development to

entrepreneurial activity. However, apart from several theories, empirical

findings do not allow us to draw any definite conclusions on the connection

between overall economic development and any aspect of entrepreneurship.

It is important though to identify the three different ways in which economic

development is facilitated . These are:

1. Growth of capital stock.

Capital is one of the key elements of entrepreneurship, and when more

capital is available it is assumed that entrepreneurial activity will be

facilitated.

2. Technological progress.

Technological progress is imported as well as endogenous to the

entrepreneurial activity. New technology is some times adopted by the

entrepreneur, while in other instances developed through the

knowledge base that is established by past entrepreneurial activity.

3. Endogenous increase of personal wealth.

In the case that the entrepreneur or the worker will accumulate wealth

from own work, it is expected that this wealth will be directed to new or

further entrepreneurial activity.

1.4.2 Industrial Structure

As policy or economic development change an economy’s industrial structure,

new work patterns arise. Demand for different kind of education, skills and

work force characteristics in general arises. In this sense, entrepreneurial

activity is affected when economies move towards se rvice based



structures . Self employment and entrepreneurial activity is more prevalent in

the service sector, mainly due to the low entry barriers and initial investment

requirements. In general, structures including ‘one to one’ labour intensive

personal services, seasonal jobs and jobs that require varying skills attract

higher entrepreneurial activities. So, manufacturing and industrial activity

attracts the lowest rates of self employment.

In many cases, changes in industrial structure of a country’s economy result in

structural unemployment, which in turn has an effect on entrepreneurial

activity (as depicted previously).

1.4.3 Government Policy

Governments, especially the ones of developed and developing countries,

take several decisions that indirectly or directly affect entrepreneurial activity.

One major issue is the extent of employment protection . In terms of

employment protection we refer to minimum wages policy and the ability of

the employer to terminate contracts with employees. When there is no

minimum wage policy and employees are not protected by law, it is highly

possible that some will turn to self employment, since the opportunity cost is

lower. On the other hand, a strict minimum wage policy and employee

protection law will push people towards employment. However, in this case

employers are less willing to employ people, since costs are higher and not

flexible, and might rely on extended working hours or part time employment to

deal with increased demand periods. This is especially true for highly

seasonal industries, such as tourism. Hence, strict minimum wage and

employment protection policies are considered as barriers to entrepreneurial

development.

Retirement policies , especially from the public sector, often lead people to

self employment. This occurs partly for income reasons and partly from

situations where retirement incentives to leave the service are given to young

individuals. In such cases, partial retirement is a way of continuing work. If

however, the welfare state is larger and pensioners can live optimally and

according to their needs, self employment rates are lower.



Interest rate policies affect mainly financing options within the economic

system. Higher rates will make borrowing more expensive and slow down

entrepreneurial activity, while lower ones will enhance capital investment.

Also, higher rates will push people to saving money, rather than spending

and, hence, businesses that offer non essential goods or services will

experience a drop in sales. Several studies have shown a negative correlation

between interest rates and self employment. Moreover, when interest rates

increase, less new businesses are established and firm deaths increase.

In recent years, governments in Europe have been looking towards

entrepreneurial activity in order to solve structural economic problems.

Starting with the UK and what was named ‘enterprising culture’ and ranging till

today, governments are trying to enhance new firm creation, in order to lower

structural and regional unemployment through new employment opportunities

within the growing new firms. In this direction, the EU has been offering

incentives for firm creation and growth, firm networking, and research and

development. These initiatives have been focused on sectors that are different

in each country and theoretically enhance the national competitive advantage.

These policies are further supported by de-regulation initiatives in areas that

have been governmental monopolies for many years, such as energy,

telecommunication, transport etc. More on the policies that support

entrepreneurship will be discussed in the material prepared for the second

part of this course.



1.5 A Final Look at the Entrepreneur

In order to summarise the above literature on entrepreneurship and the

entrepreneur, it is useful to look at two models that manage to categorise

entrepreneurs. These more realistic and empirical models , might offer the

opportunity to link lived experiences with the theoretical background offered

above.

Firstly, Webster (1977) offers four broad categories of the individual

entrepreneur, several of which are analysed later in this text:

• Cantillon Entrepreneur (the one that brings resources together).

• Industry Maker (establishes a new industry).

• Administrative Entrepreneur (Intrapreneur).

• Small Business Owner.

Moreover, Webster also suggests a similar segmentation of entrepreneurial

ventures:

• Large Payoff Venture

A business where the expected results are significant and therefore

many participants share risk and income.

• Large Payoff Venture

The same as previously, with the risk taken however by few key

investors.

• Small Payoff Venture

A business where the expected results are moderate and therefore

only a few investors participate.

A second approach is the one of Landau (1982), who derived the matrix

shown below, which adopts a description for each entrepreneur relative to

risk and innovation levels :

• Gambler (High Risk – Low Innovation).

• Consolidator (Low Risk – Low Innovation).

• Dreamer (Low Risk – High Innovation).

• Entrepreneur (High Risk – High Innovation).



Figure: Landau’s Classification of Entrepreneurial Types

Finally, in order to answer the practical question that is of importance at the

final stage of this analysis, the reader should be able to identify different types

of entrepreneurs depending on their background. The understanding of this

will offer the opportunity to move on to more in depth reading in the field of

entrepreneurship and a more clear view of the forces that bring people to self

employment and entrepreneurial activity. According to Wickham (2001), the

following types of entrepreneurs can be found in th e market :

• the inventor and technical innovator,

• the unfulfilled manager,

• the displaced manager,

• the young professional, and

• the excluded: e.g. ethnic or minority entrepreneurship.

In order to draw a real-life parallel of these theoretical approaches to

entrepreneurship, the reader can find below a variety of statistical evidence on

entrepreneurship. This evidence refers to the European Union and is part of

the Eurobarometer on entrepreneurship published by the European

Commission in 2004. Each table refers to specific questions that were put to

the survey’s sample. It is highly advisable for anyone interested to explore

such data and read the full report.



Figure: Evolution of Employment Choice over Time; EU and USA

Figure: International Variance of Employment Choice



Figure: Detailed National Variance of Employment Choice



Figure: Sample Variance of Employment Choice

Figure: The Reason behind Choice of Paid Employment



Figure: The Reason behind Choice of Self Employment

Figure: The Actual Intention of Becoming Self Employed



Figure: The Feasibility of Becoming Self Employed

Figure: The Main Risks as Perceived by Future Self Employed



Discussion Points:

• Which economic approach to entrepreneurship do you consider to

be the most adequate and why?

• How do you identify the role of entrepreneurship in the economy

throughout the years, based on the evolution of theory?

• Do you accept the psychological traits approach as a valid

theoretical background to entrepreneurship? Can you give explain

your answer by practically applying this theory to a well known local

entrepreneur?

• What is your attitude towards risk taking and how does this relate to

your cultural and family background?

• Why would your government want to support entrepreneurship in

your country and how would you as a policy maker decide to

support it?

• What effects on the national economy result from increasing female

entrepreneurship and self employment?

• What is the industrial structure of your local economy and where do

you think that entrepreneurial opportunities lie?

• What is the ethnic minority status in your country and how do

existing minorities act entrepreneurially?



2. Introduction to the Entrepreneurial Process

In the previous part we discussed the theoretical background of

entrepreneurship and many of the aspects that researchers have looked into

regarding its complications. In order to offer a better understanding of

entrepreneurship at this point, it is essential to briefly present the main

elements of the entrepreneurial process. A more detailed and practical

analysis will be discussed within the material of another Part of this course.

2.1 The Drive behind Entrepreneurial Change

The entrepreneurial process is the mechanism through which the

entrepreneur receives the return on his or her investment. It needs the input of

a variety of elements, in order to add value on the initial materials and deliver

an output. In this sense, the entrepreneurial process is the mechanism by

which the entrepreneur bridges the gap between the current situation and

what is considered possible. This is the way an entrepreneur brings about

change and makes a difference in the market. As a result, even in small

entrepreneurial projects, the entrepreneurial vision is the key element in

exploiting innovation in order to produce value that is not solely financial.

Hence, the entrepreneur situates his venture within a process where tension

escalates between the actual and the possible. This tension has three key

dimensions: financial, personal and social . Firstly, entrepreneurship is an

economic activity and is mainly concerned with creating stable, growth-

oriented and profitable businesses. These businesses need to secure

financial resources, in order to survive within their competitive environment

and to increase the value of the overall market by exploiting an opportunity.

So, the first dimension relates to the value creating potential. Secondly, the

entrepreneur needs the potential to persist and achieve personal goals. In this



� Understand the levels of change that entrepreneurship makes.

� Identify the components of the entrepreneurial process.

� Understand the concept of the entrepreneurial mindset.



dimension, the entrepreneur is driven and motivated by a variety of factors –

wealth creation being just one of them – that differ from individual to

individual. In several occasions, the force behind the personal potential to

achieve might not be the target, but the process. Thirdly, as the entrepreneur

operates within a social context, there is both a positive and negative force

towards the change he or she wants to drive. Therefore, a degree of social

responsibility is essential, in order to bridge the gap between the actual and

the possible. In several occasions, society is not ready or willing to follow the

entrepreneur’s lead.

Figure: Tension in the Entrepreneurial Process

2.2 The Entrepreneurial Process

At the centre of the entrepreneurial process, is an individual. The entrepreneur

is the agent of change and the economic factor that adds value to the

production chain through the exploitation of an opportunity. As numerous

theories suggest, the entrepreneur combines a variety of other factors in order

to increase his or her wealth. These other factors apparently coexist in the

business environment, but no other person has realised their combined

value or has not managed to combine them properly . This is why the

entrepreneurial process is not the same in every case. However, it is essential

to identify three key elements that the entrepreneur needs to put together in

order to deliver change and experience success. This means that, in order to

have an entrepreneurial process, opportunity, resources and organisation

need to be co-existent with a person that will facilitate the overall process. In

some cases, the entrepreneur might be a group of people with different roles.

Such groups could be family, friends or partners.

Firstly, the entrepreneur needs to identify opportunity. A simple and

straightforward definition of opportunity is that it is a gap left in the market.

TENSION The Actual

The Possible



Due to this gap, there is potential for wealth creation, by catering for the needs

of customers that are either not fully or not at all served. The opportunity lies

within a variety of things that could either be absent from the market or that

could be done in a different way. The concept behind the opportunity is the

idea, so often referred to by successful entrepreneurs. In order to be

successful though, the other people in the market, suppliers and customers,

need to understand and welcome this idea.

Figure: The Entrepreneurial Process

Secondly, after the opportunity has been identified and the idea

conceptualised, the entrepreneur needs to lead and direct. This is why one of

the key attributes of the entrepreneur is managerial ability, which

characterises the way he or she co-ordinates different people. Also, the

entrepreneurial process usually suffers under limited resources and the

inherent risk of something new in the market requires the best combination of

what is at hand. Otherwise, though the target might be reached, the business

might experience problems related to capital and cash flow management.

Hence, the type of leadership each entrepreneur uses in order to manage the

business, affects directly its future. Usually, charismatic leadership is needed

to motivate employees and enhance trust as far as suppliers and customers

are concerned. The scarcity of resources also forces entrepreneurs to work in

networks and support each other in difficult times. These network

The Entrepreneur

Organisation Resources

Opportunity

Identification

Leadership & Direction

Attraction & Management



relationships can be formal or informal, based on exploitation or altruism, and

have long or short term potential.

Thirdly, in order to realise the opportunity and materialise the idea, the

entrepreneur must be in the position to acquire the necessary resources.

Resources include money, people, knowledge and skills, and materials.

Resources can be tangible and intangible, such as name, reputation and

customer trust. In order to exploit these resources, the entrepreneur needs to

attract capital of any form that will guarantee their availability. As mentioned

before, resources in the entrepreneurial process tend to be scarce and,

therefore, apart from acquiring them the entrepreneur needs to exploit them

cautiously.

So, in order to have an entrepreneurial process, we need three co-existing

factors and a facilitator – the entrepreneur.

2.3 The Entrepreneurial Mindset

As mentioned above, three elements of the entrepreneurial process need to

co-exist so that the entrepreneur can bring about change. So, in the first

instance what is required is the existence of an individual that can

recognise opportunity, direct an organisation and a cquire resources .

This individual will become an entrepreneur in the moment the decision is

made to combine the three elements. For a society therefore that is looking to

be entrepreneurial and to experience economic growth through individual

innovation, it is important to cultivate the entrepreneurial propensity of its

members. What is needed is a significant amount of latent entrepreneurs that

will become active the moment all three elements co-exist. This way, the

society secures that no opportunity will be left unexploited and, therefore,

growth through entrepreneurial activity will be boosted.

Looking at the person that is needed to facilitate the combination of

opportunity, organisation and resources, it is easy to identify the difference

between a manager and an entrepreneur. The manager is probably good at

organising and leading, and knows how to realise goals with given resources.

The entrepreneur, apart from being a good manager, needs to be able to



identify, screen and exploit opportunities. He or she needs to formulate ideas

from opportunities that others cannot see into an effective and realistic

business plan. An entrepreneur needs to walk on the clouds and, at the same,

time be realistic. This ability to dream and materialise these dreams is what

one could call the entrepreneurial mindset.

McGrath and McMillan (2000) offer several characteristics of this

entrepreneurial mindset:

• Passion in seeking new opportunities.

• Discipline in pursuing these opportunities.

• Correct choice of the best opportunity to pursuit.

• Focus on execution (adaptive execution).

• Involvement of a significant number of other individuals.

In different countries different levels of entrepreneurial propensity and activity

can be found. In some countries more people claim that they want to be self

employed than actually are. In others it is quite the opposite. Also, in some

countries self employment and entrepreneurial activity is the result of over-

optimism. Hence, what an economy needs are people that will actually

become entrepreneurs by calculating the true level of risk. In order to have

this, the notion of entrepreneurial mindset needs to become a key ingredient

of the society’s culture. This can be achieved mainly through education and

role modelling, an effort that has been successful in countries such as Ireland

and the UK. Especially in transition economies, where the notion of private

economic activity has not been part of the culture for many years, cautious

steps need to be taken in order to produce the proper entrepreneurial mindset

among the younger generations. When the entrepreneurial mindset is

optimised, then the government can enhance entrepreneurial activity by

subsidies and supportive measures. The entrepreneurial mindset can be

considered the backbone of the enterprise culture.



Discussion Points:

• What are the forces behind entrepreneurial activity? Identify two or

more entrepreneurs and consider which is the most strong for each

one of them.

• How would you schematically present the entrepreneurial process?

How does it interface with other items of the economic activity?

• What could be the barriers to the entrepreneurial activity? How can

they be overcome?

• How do you describe your personal entrepreneurial mindset in

relation to the one of your country?

• What is the role of education in shaping the entrepreneurial

mindset?

• What type of practical support and instruments should be given to

schools to encourage entrepreneurship activities?



3. Entrepreneurship “of need” vs. “of opportunity”

As mentioned in the previous chapter, in order to have an entrepreneurial

process we need four factors to co-exist. The key one is the entrepreneur, the

individual that feels the need to pursuit the opportunity, organise the process

and attract the resources. The force behind this need to do these three things

is not always easy to understand. Obviously, for an individual to be willing to

take risk there must be a significant force behind this decision, in order to

overcome the resisting ones. In this chapter we will try to differentiate between

two kinds of forces.

The first one is the force that pushes the entrepreneur to undertake risk .

In this case, the entrepreneur has no obvious reason for pursuing an

opportunity other than to increase his wealth and become successful. Hence,

the individual is in a position that is not unfavourable for him or his family and

when an opportunity presents itself he or she decides to pursuit it or not. In

such cases, the risk is sometimes greater, because the individual trades a

rather secure financial and personal situation with a risky attempt to achieve

more. Apart from financial reasons though, this force might also stem from a

need to achieve something, fulfil ones dreams, be successful, etc. So, we call

this entrepreneurial activity as one of opportunity , since the entrepreneur

does not necessarily need to do something different than he or she is doing at

that point.

On the other hand, we have a force that pulls the entrepreneur towards

risk . Such cases result from a variety of reasons that make an individual

become self employed, because there are no other alternatives. The reasons

an individual has no other choice vary. On one side we have strict economical

issues, such as satisfying basic needs. On the other hand, one could also



� Differentiate between entrepreneurship of need and the one of

opportunity.



include in this case feelings of un-fulfilment, lack of interest or disappointment

in general. The latter ones however not being so essential to the survival of

the individual. Economic issues usually relate to employment discrimination

and are the direct result of the fact that the individual has no way to earn his

or her living. Therefore, self employment is the only choice that remains for

the individual to cater for personal and family needs. So, this kind of

entrepreneurial activity reflects the need of the entrepreneur to reverse the

financial situation under which he or she suffers. People that experience

employment discrimination might belong to one of the following groups:

• Women.

• Unemployed due to structural changes in the industrial profile of an

economy.

• Convicts that return to normal life after prison.

• Former drug addicts.

• Individuals with mental or physical disabilities.

• Ethnic groups and minorities.

• Religious minorities.

• Illegal immigrants.

All these groups have in common the fact that they include people with similar

problems, which do not allow them either to be accepted by other members of

the society or have specific needs regarding their employment. The problems

might stem from communication compatibility, lack of skills, past wrongdoings,

cultural bias, racism etc. Apart from people that belong to one of the above

groups, there are also individuals that have no apparent reason to experience

employment discrimination, but might still suffer under it. Finally, in several

economies there might be situations when the majority of the society is facing

employment issues and is therefore forced to earn their living in another way.

Such situations include the collapse of economic activity or post-war periods

where the entire infrastructure is destroyed. Such periods include the great

depression in the USA in 1929 or the post-war era of the European continent.

Turning to self employment in case of need will usually lead people to grow

their business up to a point. This point is defined firstly by the amount of



capital they can invest and secondly on their personal aspirations. In the first

case, it can be expected that an individual experiencing employment

discrimination will have the same problems in attracting capital. In the second

case, when the business is up and running, growth might not be the key

objective of the entrepreneur. In most cases entrepreneurs of need will set a

goal of income that would relate to the salary they would expect from

employment. Hence, another key difference between entrepreneurship of

opportunity and the one of need is, apart from the starting point, the final goal

of the entrepreneur. In the former it will be growth and accumulation of wealth,

while in the latter it might be restricted to earning ‘an honest living’. Hence, we

would be rather discussing small business management than

entrepreneurship. Of course this is not limiting, since the goals in each case

are related to the capacity of the individual entrepreneur.

Finally, employment discrimination and entrepreneurship of need might lead

their subjects to illegal business activities. The illegality of these activities

might range from not paying taxes or registering the business, to pursuing

illegal opportunities per se, such as selling drugs, trafficking, violation of

copyright laws, etc.

Discussion Points:

• Do you think that entrepreneurs of need have a different approach

to business management than those of opportunity?

• Can an entrepreneur of need introduce significant innovation in a

market or is he or she restricted to small scale projects?

• Can you identify a period in your nation’s history, when all economic

activity was stopped? Did any well known entrepreneurs emerge at

that time?



4. Serial Entrepreneurship

In several economies it is possible to locate entrepreneurs that appear to be

more active than others. Such entrepreneurs might be starting one business

after the other and expanding their risk taking constantly. Such entrepreneurs

are considered to be serial. Behind the choice of serial entrepreneurship one

can find a variety of driving forces that can be split into two main groups. The

first one includes entrepreneurs that follow a strategic path to incre ase

their wealth by including in their activities compl ementary or other

businesses . In this case new ventures are set up to facilitate the key idea

behind the initial one and the whole process is part of an overall

entrepreneurial vision. The second group includes entrepreneurs that,

according to the psychological traits theory approach, are motivated mainly

by other rewards than money and they feel great sat isfaction is setting

up businesses .

Following the above, we can define two sub-groups of serial entrepreneurs.

The sequential entrepreneur will start a business; bring it to a point and then

move on to start the next one. In essence, they handle one business at a time.

These people appear to be enjoying the process of opportunity exploitation

more than running an established business. Many explanations can be

offered, ranging from the adrenaline rush of risk taking to the fact that an

individual’s competitive advantage is setting up businesses. In any case, the

serial entrepreneur will set up the business, fine tune it and then sell it, using

the proceeds to start his or her new project. In this context, there have been

suggestions that when a business is set up and running, the actual

entrepreneurship phase is over. The portfolio entrepreneur will, on the other



� Understand the concept of serial entrepreneurship.

� Identify different forces behind serial entrepreneurship.

� Explain the choice of an entrepreneur to become serial.

� Classify serial entrepreneurs according to their choices.



hand, retain management and ownership of his established ventures and

move on to create something new. These serial entrepreneurs follow an

overall strategy for growth and may have vertical or horizontal expansion in

mind. Also, increasing the entrepreneurial portfolio might even be the proper

way to handle risk, by spreading it across different activities with different

threats.

The special skills needed for serial entrepreneurship are all included in a well

established entrepreneurial mindset: Opportunity recognition and evaluation,

market analysis, customer insight, securing of capital and decision making

ability. This might be the case why some entrepreneurs choose to be

sequential ones. On the other hand, portfolio entrepreneurs exist in cases in

which the initial idea, the core business concept, is applicable to more than

one products, services or even industries, and hence the opportunities appear

to be endless.

Overall, Wright et al. (1997) classified serial entrepreneurs as follows:

• Defensive serial entrepreneurs, who might be forced to exit the initial

market they were in. Reasons could be failure, market saturation,

floating of the business etc.

• Opportunist serial entrepreneurs, who are going after the financial gain

of the start-up process and are probably short-term oriented.

• Group-creating serial entrepreneurs, who follow a strategy that includes

more than one business. One could separate between those who make

deals and buy other businesses and those that create each time the

business they require to pursuit their strategic outlook.

It is important to underline at this point the overall importance of failure in the

entrepreneurial process. As risk is inherent in all entrepreneurial activity, the

possibility of failure is an option for which all entrepreneurs need to be

prepared for. In general, failure has a different meaning in each culture and

economy. Some cultures embrace failure and understand its value. In order to

fail one must try, and by trying the entrepreneur is both aiming at a better

tomorrow for him or herself and at the same time will return a part of his



earnings to the society. In other cultures failure is not that well received and

entrepreneurs that failed once have a difficult time getting on. In serial

entrepreneurship failure is important because an entrepreneur that tries

something new after a failure might experience varying feedback. There are

investors that trust a failed entrepreneur more, because they consider that he

or she has learned a lesson. On the other hand, there are more formal

institutions, such as banks or even the state that will turn down any loan or

support to a failed entrepreneur. Also, the legal aspects of bankruptcy

determine a country’s attitude towards failure.

Finally, one identifies family entrepreneurship within the serial

entrepreneurship context, since in many cases proceeds from an initial

entrepreneurial activity are given as capital to the younger generation, in order

to pursuit their own opportunities.

Discussion Points:

• Why would an entrepreneur want to be serial?

• Why would an entrepreneur need to be serial?

• Can you give two or more examples of entrepreneurs that have

chosen to be serial ones for different reasons?

• Do you believe that the ‘rush’ of the start-up or the diversification of

risk management is more appropriate to explain serial

entrepreneurship?

• How do you perceive entrepreneurial failure in relation to future

business activity?



5. Entrepreneurial Networks

Having read the psychological traits approach to the entrepreneurial

personality, one could describe entrepreneurs as individualistic and

autonomous. However, in recent years, extensive research in the area has

developed a new aspect of entrepreneurship. Networks and networking has

become a prominent and important research target, in the attempt to better

understand the entrepreneurial process. As mentioned beforehand, the

entrepreneur has to manage an organisation that tries to exploit an

opportunity, based on scarce resources. These resources include, apart from

raw materials, capital, skills, knowledge, technology and other that differ from

business to business. Hence, formal and informal networking, or what is also

called social capital , plays a significant role in the success and growth of the

entrepreneur’s venture.

It is difficult to define networks and networking, although most people

understand grossly what these words stand for. As a basis for discussion, it is

enough to define networks as constructs that are based on formal and

informal overlapping relationships of the business with its environment – or

the entrepreneur with other individuals. Hence, networks are continuously

being set up by each new business that enters a specific market, and

therefore no network remains static. Each new member becomes related with

all the others through networking with members of other networks. It is clear

then, that a networking process has to offer a lot to an entrepreneur in terms

of receiving – especially when one is prepared also to give. Networks are

primarily transactional.



� Describe formal and informal entrepreneurial networks.

� Describe informal entrepreneurial networks and relationships based

on their characteristics.

� Understand the value of entrepreneurial networks.



The entrepreneur gains from his or her network a variety of things. At a

starting point, the entrepreneur might gain access to capital, information and

advice. Moreover, innovation can also be a result of networking, observing

other members of the network how they deal with or manage novelties.

Formal networks include professional bodies, chambers of commerce,

alumni associations etc. Informal networks are numerous and range from

close friendships to casual meetings with other entrepreneurs over dinner.

The benefits of formal networks are obvious, including lobbying and support,

while the informal ones offer a different support: extension of strategic

competencies, identification of opportunities, contribution to own resources

during extra ordinary situations. In this sense, it has been shown that

entrepreneurs that have difficult access to informal networks, have access to

less free information and are therefore forced to operate with less capital – in

a broader sense – than their peers (Leonard-Barton, 1984). In many cases,

entrepreneurs tend to get involved in informal networks even before they

establish their business, during the screening stage of the opportunity they

have discovered.

Figure: Example of a Social Network Map

In general, entrepreneurial networks have a variety of characteristics that

mainly deal with small firms and are briefly depicted below:

1. Morphological Characteristics (pattern and structure) (Mitchell, 1973):

a. Anchorage.

Key: Participant in society: individual, household, group, organisation Direct relationship shared between members in an interaction

Indirect relationship (influence) shared between members more than one step away from each other



The focus of the network can lie on the business or the

entrepreneur, depending on the situation and the years of

existence of the business.

b. Reachability

The anchor of the network – as described previously – interacts

with the other elements within the social construct of the

network. The measure of how far and how easy this interaction

takes place is the reachablity. One can count number of

interactions within the network in order to reach the desired

network member. The fewer the interactions, the higher is the

reachability. In this sense, one can draw the boundaries of the

narrower and the wider network of a business and understand

the effort required to acquire resources that are available

through this network. Also, in such an examination, one can

identify the network members that link this network with other

ones.

c. Density

Networks can be tight or loose, depending on how close all the

members are with each other. In cases of networks in which all

members interact directly with all other members, the density is

at its highest values. On the other hand, if a network member

needs to go through several other members in order to reach the

objective, the network is considered to be loose. Dense

networks often result from family or friend networks.

d. Range

The range of an entrepreneurial network refers to the

heterogeneity of the members in direct contact to the anchor. If

multiple resources are available through direct contact we have

a diverse network, if not a narrow one.

2. Interactional Characteristics (perception of the relationships within a

network)

a. Content

Content refers to the meaning attributed to each relationship

within the entrepreneurial network. Each relationship has a



different level of intimacy and value for each member, and,

depending on these, the member is willing to interact differently

within each relationship. Labels such as family, friendship,

acquaintance etc describe levels of content.

b. Intensity

Again, each relationship has a different weight on each member

of the entrepreneurial network. This weight defines the

willingness to interact, respond to communication, honour

obligations and exercise rights that are given due to

relationships.

c. Frequency

Frequency measures the time entrepreneurs spend – or invest –

in order to interact with their networks and cultivate

relationships. It is important to note that frequency does not

necessarily affect the quality of exchange or the intensity of the

relationships.

d. Durability

As networks are dynamic and participation voluntary, durability

can describe the time a relationship lasts. If both sides consider

the relationship of value, there is a high probability that it will

last. This mainly depends on how much each side of the

relationship is willing to invest in it over time.

e. Direction

Direction refers to the flow of power within a relationship. One

member might be stronger than the other, and hence the weak

one receives support from the strong one. In entrepreneurial

networks direction might alternate over time or depending on the

issue, while in strong social relationships, such as friendship,

direction might not be of importance.

It is important to recognise how networks contribute to the entrepreneurial

process. Since no business exists in vacuum, it is essential to interact heavily

with its environment in order to achieve its goals. This networking process

might not be scheduled in many instances, though experienced entrepreneurs



try to include in their schedule time to interact with other network members.

Finally, it is important to underline that networks are of a reciprocal nature.

Each member receives and benefits from the network relationships, but needs

to offer, too.

1.1

Discussion Points:

• Sketch a network of your family, friends and acquaintances. Identify

resources that you can access through your network in order to

achieve your goals.

• Identify the formal business networks in your area and describe

their services and benefits for its members.



6. Intrapreneurship and Innovation

Up to this point, we have referred to entrepreneurship as an event, or a

process, that takes place outside all existing business establishments and

relates to a new venture. Having mentioned serial entrepreneurship as a

phenomenon of continuous entrepreneurial activity by an individual, it is useful

to also discuss intrapreneurship. Intrapreneurship refers to the ability of

larger and established organisations to act entrepr eneurially by taking

advantage of their human capital that has a well de veloped and healthy

entrepreneurial mindset . In this attempt, larger businesses tend to move

away from bureaucratic structures and capture innovation at its source,

enabling the communication of latent entrepreneurial intentions within their

structures.

In every innovative larger business, such as 3M, General Motors and Yahoo!,

one can identify key employees that facilitate change and introduce

innovation. These individuals could be entrepreneurs themselves and operate

as change agents within the market. However, these businesses have

captured their entrepreneurial ‘talent’ and rewarded it. Hence, instead of

experiencing the phenomenon of the dissatisfied manager, they introduce the

role of the intrapreneur. So, intrapreneurs are the entrepreneurs within

business constructs, who are given the resources to pursuit the opportunities

they have identified. Inherent to new venture creation are – apart from risk –

capital requirements, resource scarcity, knowledge and skills employment,

and other key elements depending on the situation. The individual will choose

to become an entrepreneur when he or she considers the opportunity costs

low and the prospective income significant enough to alleviate risk. In case of

intrapreneurial businesses, the entrepreneurial individual can pursuit



� Differentiate between entrepreneurship and intrapreneurship.

� Describe the enables and barriers of intrapreneurship within an

established organisation.



opportunities within an established organisation, using resources that are

easier to acquire than by a new venture, and is rewarded by his or her

employer for increasing the business’s value. In a sense, intrapreneurship is

entrepreneurship with a safety net. Therefore, returns might not be as big as

in entrepreneurial activities, but the risk is much lower, too.

Intrapreneurship can exist as a part of the organisational culture of a business

only if it is supported, embraced and rewarded . In order to enhance

intrapreneurship, businesses can employ a variety of tools:

• Intrapreneurship sponsors.

Individuals that scout for innovation within the business and clear their

schedules in order to listen.

• Continuous involvement of the initial intrapreneur.

In several organisations, the initial concept builder is gradually left out

as the project moves to more advanced stages. However, the

motivational power and devotion lies within the involvement of the initial

intrapreneur, who has to be present in all stages of the new project.

• Autonomous intrapreneurial teams.

Intrapreneurial teams need to work as entrepreneurs. They must have

power over their resources and be free to decide.

• Low level of bureaucracy.

The intrapreneur will need to access resources throughout the

organisation in all stages of the project; from idea conception to the

actual implementation of the idea. Hence, increased bureaucracy will

delay the process and might outdate the idea.

• Acceptance of risk, mistakes and failures.

When investing in new projects, an organisation needs to be able to

face failure in the same way an entrepreneur would. This failure might

come from increased risk or mistakes by the intrapreneurial team. In

any case, if failure is punished, any intrapreneurial opportunities that

might exist or come to life in the future will be discouraged.

• Devotion to a philosophy of long-term success.

Intrapreneurial activities might not present favourable results within the

time frames the organisation is used to. One idea might take longer to



become profitable than another. So, intrapreneurship requires time and

a long-term investment to flourish.

• Existence of resources for ideas.

The intrapreneur and the intrapreneurial team will need resources. The

fastest access to these resources is allowed, the fastest the idea will

reach the market.

• Reward system that supports intrapreneurship.

Any organisation that wants to enhance entrepreneurship and capture

innovation needs to have a supportive reward system. The intrapreneur

needs to be rewarded for his contribution, in order to encourage future

intrapreneurs to come forward with their ideas. Reward systems might

include short and long term pay benefits, education and health benefits.

On the other hand, barriers to intrapreneurship include:

• The hierarchical structure of the traditional large business organisation

that has many separators between lower and higher levels of

management.

• An unfavourable corporate culture that discourages communication and

flexible job descriptions.

• Performance standards and measures that are suited for large

businesses, such as short-term profits or cost control.

• Rigid and time consuming planning procedures.

• Ownership issues.

• Human resources mobility.

• Ineffective reward systems.

Finally, in the same way that we attempted to identify the traits of the

entrepreneur in another part of this text, we can also do the same for the

intrapreneur. The latter has probably a proven record of managerial capacity

and a degree of entrepreneurial thinking. So, the intrapreneur differs from the

entrepreneur in two ways. Firstly, the intrapreneur is less of a risk taker and

might view the benefits of becoming an entrepreneur and exploiting the

opportunity on his own to be not worth sacrificing his or her career. Also, the

intrapreneur has an accumulated managerial experience that can be used in



the new project. Furthermore, the intrapreneur has the choice to become an

entrepreneur at any stage of his or her career, while the entrepreneur will find

a career change to be difficult. In terms of managerial skills, the intrapreneur

has the ability to adopt multiple roles, understand and evaluate the

environment, use open discussion techniques to resolve problems and

explore possibilities, challenge the organisational culture he is part of, and

build a group of supporters – something like an intrapreneurial network.

Moreover, in terms of entrepreneurial skills, the intrapreneur needs vision and

flexibility, orientation towards action, dedication, failure management and

overcoming ability, and adoption of self set goals.

In essence, intrapreneurship as a concept is the same as the notion of

creating a society that captures innovation in any form. The social

entrepreneurial mindset, which represents the average ability of identifying

and exploiting opportunity, can be replicated within any large organisation.

However, a visionary manager may choose employees of an increased

intrapreneurial ability that will boost innovation within the business and make

the average entrepreneurial mindset of the group much higher than society’s.

If innovation is not only considered technological, a highly intrapreneurial

business will opt for people of varying backgrounds and skills, who all can

identify opportunities and formulate new business concepts.

Discussion Points:

• Identify an intrapreneurial organisation and explain how it captures

innovation?

• How can one apply intrapreneurship in the public sector or local

authorities?

• Why would you prefer to work for an intrapreneurial organisation

rather than start your own business?



7. Small and Medium Enterprises

Although this text aims at understanding the basics of entrepreneurship, Small

and Medium Enterprises are an important supplement. Small businesses and

their management are not the same as entrepreneurship. However, all

entrepreneurs start either small or medium. No new venture kicks off at a

large size; it usually grows to be one if it is successful. Of course, exceptions

to this statement are serial entrepreneurs, who have though started small or

medium with their initial venture. Moreover, Small and Medium Enterprises

(SMEs) are the backbone of all free market economies . This is why the

agenda on such businesses is always topical and in the middle of any

economic reform or industrial restructuring. Finally, SMEs are not like larger

organisations, and they behave in a different way. One cannot claim that

smaller businesses are just large ones in another scale.

7.1 Definition

Historically, small businesses can be even found in almost all ancient cultures.

As self employment and venturing is part of the human activity, small

businesses appeared in order to satisfy customer needs; in the same way that

entrepreneurs enter a market. In 2100 B.C., Hammurabi, King of Babylon,

drafted one of the first laws on small business. Its main core was actually the

protection of consumers against fraud. SMEs have gone far from that period

of history, and are nowadays regarded as the solution to many problems of

the developed and developing economies. Especially during the 1980s and

1990s there was heavy debate on the future of SMEs and an understanding



� Define Small and Medium Enterprises.

� Understand their contribution and importance to the economy.

� Understand their problems and key survival requirements.

� Describe the differences of entrepreneurship and small business

management.



that, if developed and developing economies want to prosper they will have to

support them. Following the demise of industrial production in the Western

World and the introduction of service based economies, larger organisations

and their problems led governments to understand the value of SMEs. A

result of this effort was the concept ‘enterprise culture’ that has been at the

core of economic activity in several countries, such as the UK, Ireland, the

USA etc.

SMEs are broadly defined by using three parameters: employment, turnover

and characteristics . The initial SME definition was supplied by the Bolton

Committee (1971) in the UK, when the government financed a research

project, in order to understand the small business sector and identify

opportunities to resolve social and economic problems due to privatisation

and de-industrialisation. So, according to the Committee’s work, an SME:

• employs less than 200 employees in manufacturing and 25 in

construction,

• earns yearly less than £50,000 (at that time ), and

• has a small share of the market, is managed by its owner(s) and

operates independently.

It becomes clear, that this initial definition contributed significantly towards the

understanding of SMEs. It revealed several issues of interest, such as

different employee numbers for different industries and different turnover rates

for each activity. Modern definitions are based on this initial one. However,

they have managed to resolve several problems regarding the better

description of a very large number of enterprises. Nowadays, the EU

considers SMEs in three different levels (as of 1/1/2005):



Table 1 – EU Definition of SMEs as of 1/1/2005

SME Type Employees

Turnover or

Balance Sheet Total

Characteristics

Micro 0 to 9 €2 million

or €2 million

Autonomous

Small 10 to 49 €10 million

or €10million

Autonomous

Medium 50 to 249 €50 million

or €43 million

Autonomous

This definition allows for a better segmentation of the SME population, and

identification of issues that might be relative to one sub-group only. The

employee number or turnover (or balance sheet) threshold need to be valid, in

order to belong to a sub group. The characteristic of independence though, is

applicable to all businesses and states that no SME can be linked in any way

with another business. In order to consider an SME linked to another

business, the former will need to posses 25% of the latter or vice versa. The

definition goes into some other details, which are not considered crucial at this

point.

According to this definition, in the EU there are approximately 19 million SMEs

that represent 99.9% of the total of businesses and employ about 97 million

people. In the table below, a brief overview of the SME sector is presented,

comparing different sizes within the EU. Data is for the 19 members of the EU

in 2003, according to a European Commission (2004) publication on SMEs.



Table 2 – Data on EU SMEs for the Year 2003

Micro Small Medium Total

SME

Other Total

Number of Businesses 17,820,000 1,260,000 180,000 19,270,000 40,000 19,310,000

% of Total 92% 7% 1% 100% (<0.25%) 100%

Total Employment 55,040,000 24,280,000 18,100,000 97,420,000 42,300,000 139,710,000

Average Employment 3 19 98 5 1,052 7

% of Total 39% 17% 13% 70% 30% 100%

Turnover per

Business €440,000 €3,610,000 €25,680,000 €890,000 €126,030,000 €540,000

% of Export in Turnover 9% 13% 17% 12% 23% 17%

In all developed and developing economies, the number of SMEs has risen

significantly since the 1980s. Also, according to the report mentioned above,

SMEs dominate sectors of the economic activity that have to do with

manufacturing. Micro enterprises, dominate areas such as construction,

wholesale, retail and personal services. Larger companies on the other hand,

dominate energy production, extraction activities, transport and

communication services, and producer services.

7.2 SME Importance and Survival

SMEs are considered to be important for the national economy for a variety of

reasons. Mainly, SMEs offer the driving force for future larger businesses. In

the case that a small business will grow, it will employ more people, increase

the national income and distribute wealth. Also, SMEs are considered

important for the advancement of knowledge, development of innovation and

satisfaction of isolated market niches. It is estimated that SMEs are 2.4 times

more innovative than larger business (according to a study by the U.S.

Small Business Administration in 1995). Moreover, SMEs offer invaluable

experience to young people that enter the labour market after education.

Finally, smaller businesses can better accommodate the needs of special

employee groups. Finally, SMEs are the area from which entrepreneurial

activity is born. Sadly, SMEs have many problems. These problems often lead

to firm death, and it is usual that the number of firms closing down each year



is almost the same as the ones being established. Both business birth and

death rates are very high in the SME sector, especially among the micro and

small ones. However, some businesses manage to survive and these

ultimately are expected to make the difference.

SMEs have a variety of strengths that include:

• Financial performance

Compared to larger businesses, owners of SMEs experience a higher

return on their investment. This is also the reason why some industries

are better suited for small rather than large businesses.

• Innovation

SMEs are more flexible and can capture innovation much faster than

larger businesses. If the resources are there, they can market products

and services very fast.

• Dependence of Larger Businesses on SMEs

In the market, most large businesses depend on SMEs for the delivery

of resources, services and other input for their production process.

• Employment

As mentioned beforehand, SMEs can increase employment rates. They

have simple employment policies and can usually find the necessary

skills needed for them to respond to the market, with cost being the

only restriction.

On the other hand, SMEs face several weaknesses, the most important ones

being high failure rates and lack of managerial expertise. Also, globalisation

and information technology can either pose as a threat or an opportunity for

an SME, depending on its flexibility and vision. Moreover, traditional SMEs

might face a variety of problems that are results of the key differences

between large and small businesses. These are:

• The owner, i.e. one person, has the biggest influence on the business

and so the business is dependent.

• Small businesses cannot affect their environment, but can be affected

by it.

• Usually, small businesses are single market players and offer their



products or services to a restricted part of the overall market.

• Small businesses rely in most instances on a small number of

customers. Especially in the business to business sector, small

business might even have a sole client.

• Small businesses will have difficulty raising capital and thus they

experience problems in expansion and strategy formation.

7.3 The Difference between Entrepreneurship and SME Management

Entrepreneurship and SME management can in many cas es coincide,

though it is not the same thing . An educated individual within the enterprise

culture should be in a position to distinguish between entrepreneurs and small

business managers. In order to avoid a misunderstanding at this point, it

needs to be stressed out that both entrepreneurial and small businesses are

very important for the society and the economy. They are almost equally

important, since both supply the economy with income and increase its

cumulative wealth. They also both offer employment to people by increasing

their production and help alleviate social problems, such as unemployment.

However, they are very different in terms of their existence, since they pursue

and create new opportunities in a different way. So, although the benefits to

the economy are grossly similar, entrepreneurial and small businesses serve

different economic functions.

The main differences of entrepreneurial compared to small businesses are in

the ways they pursue and create new opportunities, and they fulfil the

personal ambitions of their owners. Differences can be identified both on a

personal level, entrepreneur vs. SME manager, and on a business level,

entrepreneurial vs. small business. The first differentiation is rather subjective

and case sensitive. Each business may require different personalities and

each entrepreneurial attempt, too. So, we would rely on the personal traits

theory for understanding that. However, it is much more straightforward to

distinguish entrepreneurial from small businesses. This distinction would

definitely also imply some things for the personality of the founder/owner. In

order to understand the distinction, we need to look at three different elements



of business:

1. Innovation

Unlike the small business, the successful entrepreneurial venture is

constructed upon a significant innovation. The opportunity lies more in

the area of an unexploited concept, while in the case of SMEs the

opportunity might be replication or slight differentiation of an existing

concept. Also, a small business might be introducing an innovation to a

part of the market that had no access to it. However, it is still not

considered to innovate, it is rather perceived as distributing innovation.

2. Growth

We cannot use size of business to determine whether it is

entrepreneurial or small; especially when the definition of an SME is in

a constant debate among researchers and policy makers. However,

there is a more intrinsic approach in terms of growth potential.

Entrepreneurial businesses have in fact a much higher growth potential

than small businesses, due to the level of innovation applied and the

value of the opportunity pursued. This can also imply that

entrepreneurial ventures might be slightly riskier than small businesses.

An entrepreneurial business might even be the start of a new industry

and a multinational company. On the other hand, small businesses

usually face market restrictions.

3. Strategy

All managerial acts require objectives and goals. These objectives and

goals characterise a business’s strategic outlook. Small businesses

usually form an informal strategy in terms of objectives that refer to

sales targets and cost reduction. Entrepreneurial businesses on the

other hand, will go far beyond the near future and formulate a strategy

similar to a larger business. In the entrepreneurial strategy, growth

targets, market development and share perspectives will be present, as

well as the key turning points in the businesses future.



Figure: The Difference between Small Businesses and Entrepreneurial

Ventures

Both entrepreneurship and SME management can create significant wealth

for the founder(s). Also, entrepreneurial ventures can be considered to be a

subset of the SME set of businesses. Finally, both types of activities belong in

the category of self employment and have a much higher risk than paid

employment.

Finally, in order to briefly return to the differences of the person, the

entrepreneur and the small business owner/manager, it is valid to say that

entrepreneurship is a different way to manage a bus iness . The

entrepreneurial venture requires visionary management, in order to

encompass innovation, growth and strategy. A small business manager might

be very effective day to day manager, but may lack the ability to position his or

her business in the future within a complex and dynamic environment. So, one

could identify as ingredients of entrepreneurial management a focus on

change, a focus on opportunity, and the ability to manage the business

organisation-wide. These differences between entrepreneurs and

administrators are summarised by Stevenson (1999), whose analysis is based



on six key dimensions:

1. Strategic Orientation:

• Entrepreneur: “I will search for opportunity, and my

fundamental task is to acquire the resources to pursue

opportunity.”

• Administrator: “I will prune my opportunity tree based on

the resources I control. I will not try to leap far beyond my

current situation.”

2. Commitment to Opportunity:

• Entrepreneur: Revolution – Risk calculation.

• Administrator: Evolution – Risk aversion.

3. Commitment of Resources:

• Entrepreneur: Do a little more with a little less.

• Administrator: Large-scale commitment to resources.

4. Control of Resources:

• Entrepreneur: Using but not owning resources.

• Administrator: Acquisition and security of resources.

5. Management Structure:

• Entrepreneur: Self-centred with informal relationships.

• Administrator: Formal and structured organization.

6. Reward Philosophy:

• Entrepreneur: Based on creation and harvesting of value.

• Administrator: Protection of own position and security.



Discussion Points:

• How important are SMEs in your country?

• Why do most SMEs fail? Is it an acceptable fact or can this be

changed?

• Can you identify an entrepreneurial business and an SME? Can you

identify their key differences?

• How do you understand the concept of growth potential?

• How do you evaluate yourself? As an Entrepreneur or an

Administrator? Why?

• Which is more important: entrepreneurial behaviour or

administrative competence?



8. Future Challenges for Entrepreneurship Research

In this initial part of the course material, we have looked into the theory of

entrepreneurship as it has developed over the years. We identified a variety of

theoretical approaches and discussed the interdisciplinary nature of such a

crucial field. Also, we looked into several other aspect of entrepreneurship that

have emerged over the years and have attracted the interest of researchers.

The only issues that were not dealt with in this part have to do with economic

growth through entrepreneurship and the application of entrepreneurship

within various types of economic systems. These are included in the next

Part.

As the field of entrepreneurship evolves, research is dynamic and evolves

along. Entrepreneurship research is an applied scientific process that aims at

understanding and explaining. Busenitz et al (2003) reviewed all significant

academic output in the field and identified the future challenges of

entrepreneurship research. They claim that the boundaries of the field have

been set and therefore the time has come for researchers to start combining

theories and approaches and attempt to establish an inter-disciplinary

research profile. The key elements of such a profile would include research

topics that are at the intersections of the following items that have been

heavily researched:

• The business environment

• Individuals and teams

• Opportunities

• Mode of organising

Also, other topics could be combined with the above, such as:

• Decision-making theories



� Be aware of the future in entrepreneurship research.



• Start-up factors of production

• Information processing

• Network theory

• Education and training

Many similar propositions have been made. Therefore, it is clear to see that

entrepreneurship as a field has reached maturity and requires at this point

more challenging research questions in order to move forward.

The reader might find it interesting to follow the articles and material published

in a variety of academic journals and other resources. The key journals on

entrepreneurship that are being reviewed by prominent academics are:

• Journal of Business Venturing.

• The Journal of Small Business Management.

• Small Business Economics.

• Entrepreneurship Research and Development.

• Entrepreneurship: Theory and Practice.

• International Small Business Journal.

• Family Business Review.

• Creativity and Innovation Management.

Also, other significant academic journals that often publish articles on

entrepreneurship are:

• Academy of Management Journal.

• Academy of Management Review.

• Journal of Management Education.

• Strategic Management Journal.

Moreover, one can find numerous theoretical and applied resources on the

Internet. For example, Google offers 23,400,000 results for the word

entrepreneurship only. However, one be very careful about the quality of the

information available through the Internet. In general, it is advisable not to use

material accessed through sites that do not belong to prominent and well



known institutions, organisations and universities.

Finally, there are many books on entrepreneurship, both academic and

practical. Any book will offer insight on the field and widen the horizons of the

reader. However, the reader should carefully select where and how to spend

his or her budget.

Discussion Points:

• Formulate one research question in the area of entrepreneurship

and describe why this is of importance. How would you research it?



Part A Bibliography and Further Reading

Amit, R., Glostein, L. and Muller, E. (1993) Challenges to theory development in entrepreneurial research, Journal of Mathematical Sociology, 30, pp. 815-34

Appelbaum, E. and Katz, E. (1986) Measures of risk aversion and comparative statistics of industry equilibrium, American Economic Review, 76, pp. 524-29

Arabsheibani, G., de Meza, D., Maloney, J. and Pearson, B. (2000) And a vision appeared unto them of a great profit: evidence of self-deception among the self-employed, Economic Letters, 67, pp. 35-41

Aronson, R.L. (1991) Self Employment: A Labour Market Perspective, Ithaca, New York, NY, ILR Press

Bernardo, A.E. and Welch, I. (2001) On the evolution of over confidence and entrepreneurs, Journal of Economics and Management Strategy, 10, pp. 301-30

Blanchflower, D.G., Oswald, A. and Stitzer, A. (2001) Latent entrepreneurship across nations, European Economic Review, 45, pp. 680-91

Bolton, J.E. (1971) Report of the Committee of Inquiry on Small Firms, Cmnd.4811, London, HMSO

Boyd, D.P. (1984) Type A behaviour, financial performance and organisational growth in small business firms, Journal of Occupational Psychology, 57, pp. 137-40

Bruyat, C.A. and Julien P.A. (2001) Defining the field of research in entrepreneurship, Journal of Business Venturing, 16, pp. 165-80

Burns, P. and Dewhurst, J. eds (1996) Small Business and Entrepreneurship, 2nd ed., NY, Palgrave

Leonard-Barton, D. (1984) Interpersonal communication patterns among Swedish and Boston area entrepreneurs, Research Policy, 13, pp. 101-14

Busenitz, L.W., West, G.P., Shepherd, D., Nelson, T., Chandler, G.N. and Zacharakis, A. (2003) Entrepreneurship research in emergence: Past trends and future directions, Journal of Management, 29, pp. 285-308

Cantillon, R. (1755) Essai Sur la Nature du Commerce en Général, 1931 edn. Ed. and tran. By H. Higgs, London, Macmillan

Carter, S. and Jones-Evans, D. eds (2000) Enterprise and Small Business, London, Prentice Hall

Casson, M. (1982) The Entrepreneur: An Economic Theory, Oxford, Robertson

Cooper, A.C., Woo, C.Y. and Dunkelberg, W.C. (1988) Entrepreneurs’ perceived chances for success, Journal of Business Venturing, 3, pp. 97-108

de Meza, D. and Southey, C. (1996) The borrower’s course: optimism, finance and entrepreneurship, Economic Journal, 106, pp. 375-86



Deakins, D. (1999) Entrepreneurship and Small Firms, 2nd ed., Berkshire, McGraw-Hill

Dixit, A. and Rob, R. (1994) Switching costs and sectoral adjustments in general equilibrium with uninsured risk, Journal of Economic Theory, 62, pp. 48-69

Dunn, T. and Holtz-Eakin, D. (2000) Financial capital, human capital and the transition to self-employment: evidence from intergenerational links, Journal of Labour Economics, 18, pp. 282-305

European Commission (2004) SMEs in Europe, Luxembourg, Office for Official Publications of the European Communities

European Commission (2004) Flash Eurobarometer; Entrepreneurship, http://ec.europa.eu/public_opinion/flash/fl160_en.pdf (May 20, 2007)

Goffee, R. and Scase, R. (1987) Patterns of business proprietorship among women in Britain, in Goffee, R. and Scase, R., eds, Entrepreneurship in Europe, London, Croom Helm

Hebert, R.F. and Link, A.N. (1988) The Entrepreneur – Mainstream Views and Radical Critiques, 2nd ed., New York, NY, Praeger

Kanbur, S.M. (1979) Of risk taking and the personal distribution of income, Journal of Political Economy, 87, pp. 769-97

Kaufmann, P.J. and Dant, R.P. (1998) Franchising and the domain of entrepreneurship research, Journal of Business Venturing, 14, pp. 5-16

Kets de Vries, M.F.R. (1977) The entrepreneurial personality: a person at the crossroads, Journal of Mathematical Sociology, 14, pp.34-57

Kirzner, I. (1973) Competition and Entrepreneurship, Chicago, University of Chicago Press

Kirzner, I. (1985) Discovery and the Capitalist Process, Chicago, University of Chicago Press.

Knight, F.H. (1921) Risk, Uncertainty and Profit, New York, Houghton-Mifflin

Landau, R. (1982) The innovative milieu, in Lundstedt, S.B. and Colglazier, E.W. Jr , eds, Managing Innovation: The Social Dimensions of Creativity, Invention and Technology, New York, NY, Pergamon Press

Lucas, R.E. (1978) On the size distribution of business firms, Bell Journal of Economics, 9, pp. 508-23

Manove, M. (2000) Entrepreneurs, optimism and the competitive edge, Boston University, Mimeo

McClelland, D.C. (1961) The Achieving Society, Princeton, Van Nostrand

McGrath, R.G. and MacMillan, I. (2000) The Entrepreneurial Mindset, Boston, MA, Harvard Business Review

Mitchell, J.C. (1973) Networks, norms and institutions, in Boissevain, J. and Mitchell, J. C., eds, Network Analysis: Studies in Human Interaction, London, Mouton and Company

Parasuraman, S. and Simmers, C.A. (2001) Type of employment, work-family conflict and well being: a comparative study, Journal of Occupational

http://ec.europa.eu/public_opinion/flash/fl160_en.pdf



Behaviour, 22, pp. 551-68

Parker, S.C. (1997) The effects of risk on self-employment, Small Business Economics, 9, pp. 515-22

Porter, P. (2001) Innovation and Entrepreneurship, Boston, MA, Butterworth-Heinemann

Rotter, J.B. (1982) The Development and Application of Social Learning Theory: Selected Papers, New York, NY, Praeger

Sanders, J.M. and Nee, V. (1996) Immigrant self employment: the family as social capital and the value of human capital, American Sociological Review, 61, pp. 231-49

Say, J.B. (1828) Cours Complet d’Economie Politique Practique, Paris

Schumpeter, J.A. (1934) The Theory of Economic Development, Cambridge, MA, Harvard University Press

Schumpeter, J.A. (1939) Business Cycles, New York, McGraw-Hill

Schumpeter, J.A. (1947) The creative response to economic history, Journal of Economic History, 1, pp. 149-59

Shapero, A. (1975) The displaced uncomfortable entrepreneur, Psychology Today, pp. 83-8

Sheshinski, E. and Drèze, J. (1976) Demand fluctuations, capacity utilisation, and costs, American Economic Review, 66, pp. 731-42

Stevenson H.(1999) A perspective on entrepreneurship in Sahlmann, W. et al, eds, The Entrepreneurial Venture, 2nd ed., Ohio, Harvard Business School Press

Storey, D.J. (2000) Understanding the Small Business Sector, London, Thomson Learning

Taylor, M.P. (1996) Earnings, independence or unemployment: why become self-employed?, Oxford Bulletin of Economics and Statistics, 58, pp. 253-66

Timmons, J.A.. (1976) Characteristics and role demands of entrepreneurship, American Journal of Small Business, 3, pp. 5-17

Webster, F.A. (1977) Entrepreneurs and ventures: an attempt at classification and clarification, Academy of Management Review, 2, pp. 11-22

Wickham, P.A. (2001) Strategic Entrepreneurship: A Decision Making Approach to New Venture Creation and Management, Essex, Prentice Hall

Wright, M., Robbie, K. and Ennew, C. (1997) Serial Entrepreneurs, British Journal of Management, 8, pp.251-68

Documents

INTRODUCTION TO ENTREPRENEURSHIP - Central …...Introduction to Entrepreneurship Theorising Entrepreneurship In this initial Part A of the Introduction to Entrepreneurship, we will