Essentials of Entrepreneurship: A Practical Approach

Below is a brief description of the history of entrepreneurship. We appreciate the preparation of it by Kathryn Young.

Part I:  The Evolution of Entrepreneur Definitions

Current Definitions

Emerging Definitions, with roots in economics
13^th Century
16^th Century
18^th Century
19^th Century
20^th Century

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Part II:  Profiles of Entrepreneurs

Number of Entrepreneurs in U.S.

   Global Entrepreneur Monitor
   United States Census Data

Demographics of U.S. Entrepreneurs

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Part III:  The Beginning of Entrepreneurship

Part IV:  Role of the Entrepreneur in Economic Growth

The Entrepreneurship – Economy Relationship

Forces Driving the Entrepreneur

The Importance of the Entrepreneur

   Employment
   Productivity
   Investment and Consumption

The Entrepreneur in a Down Economy

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Part V:  Role of Government Support in Entrepreneurship

Views on the Importance of Government Support

Government Resources for the Entrepreneur

   United States Small Business Administration

   State Agencies for Small Businesses
 

What follows is a brief summary of the history of entrepreneurship.  We first report definitions of entrepreneurship as they have evolved over several centuries and then discuss the number and type of entrepreneur we find in the current century.  The next sections describe the importance of entrepreneurship in developing a growing economy.  We end with a section on government’s role in entrepreneurship to support economic growth.

Each section ends with a suggested Amazon.com keyword search combination for further [i]reading.

Part I:  The Evolution of Entrepreneur Definitions

No matter what the definition or theory of entrepreneurship, all have common roots in economics, economic development/growth, and the creation of wealth.  There exist too many definitions to list, however; we have summarized the leading theories of various centuries and listed them here with the economist’s name that made them known.

Current Definitions

Per American Heritage’s dictionary, entrepreneur is defined as “a person who organizes, operates, and assumes the risk of a business venture.”[1]  Webster uses similar terms - “one who organizes, manages, and assumes the risks of a business or enterprise”.[2]

Synonyms found in Roget’s Thesaurus include “businessman, executive, and industrialist.”[3]  A more recent thesaurus by Webster includes “organizer; backer, impresario; contractor; administrator, manager; producer; promoter”.[4]

Emerging Definitions, with roots in economics

13^th Century

The earliest definition we found was from the 13^th century, where we learn the word’s root.  The origin of the English word entrepreneur comes from the French word entreprendre, which can be translated to mean “to do something” or “to undertake”.[5]

The evolving definitions depend on this root but add key philosophies founded in economic theory.  These key phrases and philosophies will be pointed out in each section.

16^th Century

In the 16^th century, we see the first mention of business used in the definitions.  Therefore, we find entrepreneur defined as someone who undertakes a business venture.[6]

18^th Century

Richard Cantillon (in about 1730 in academia) ascribed to a definition which added a risk component to the definition.  Therefore, an entrepreneur was someone who undertakes a business venture with no guarantee of profits[7];  said another way an entrepreneur is “the bearer of risks inflicted by changes in market demand”.[8]

19^th Century

During the 19^th century, three economists post views on entrepreneurship:  John Baptiste Say, John Stuart Mill, and Alfred Marshall.  This is the first century in which we begin to see the definition include actions and special skills required of entrepreneurs.  

Jean Baptiste Say determines that the entrepreneur is someone who earns profits by shifting resources from areas of low productivity to areas of high productivity[9].  He further is known to require the entrepreneur to possess knowledge and judgment so that the entrepreneur is constantly aware of the costs and prices of his goods and can determine how to compare opportunities.

Mid-century, John Stuart Mill describes the entrepreneur as someone who assumes not only the risk of a business venture (as a capitalist) but also the management of the business venture.[10]  It is this addition of a management component that builds on Say’s judgment requirement.

And in the late 1800’s Alfred Marshall emphasizes the importance of entrepreneurship by tying the resource component (from Say) and management component (from Mill) together.  Marshall claims that four primary factors are necessary for production:  land, labor, capital, and organization (which is the key factor to coordinate the other three resources).

Further, entrepreneurs could drive this organization / coordination because of:

1. An ability to forecast changes in supply and demand
2. A willingness to take on the risk of these forecasts without being fully informed
3. Expert industry knowledge
4. Natural leadership
5. Rare and limited talents, so rare in fact that the skills are in limited supply[11]

20^th Century

Joseph Schumpeter is the leading authority cited during the 20^th century and is challenged by (but similar to) theories like those of Israel Kirzner.  Schumpeter relies on the entrepreneur’s creative destruction innovation, whereas Kirzner believes the entrepreneur capitalizes on an already upset economy.

Creative destruction is defined as destroying an old economy in exchange for a far more progressed and modernized one.[12]  Schumpeter believes that someone who uses creative destruction to upset and progress an economy by changing existing combinations of resources is an entrepreneur.[13]

Kirzner, on the other hand, views an entrepreneur as someone who recognizes profit opportunities as arbitrage, acts upon them, and moves the economy to a stable equilibrium.[14]

Mark Casson best contrasts the views by describing them in terms of economic equilibrium.  Schumpeter’s beliefs stem around upsetting a steady state economy, whereas Kirzner’s beliefs stem around restoring it.[15] 

All definitions, according to Casson, require the entrepreneur to have judgment for making decisions.[16]  “Entrepreneurs are specialists who use judgment to deal with novel and complex problems.  Sometimes they own the resources to which the problems are related, and sometimes they are stewards employed by the owners.”[17]

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·        Entrepreneurship theory

·        Richard Cantillon or Richard Cantillon entrepreneurship

·        John Baptiste Say or John Baptiste Say entrepreneurship

·        John Stuart Mill or John Stuart Mill entrepreneurship

·        Alfred Marshall or Alfred Marshall entrepreneurship

·        Joseph Schumpeter or Joseph Schumpeter entrepreneurship

·        Israel Kirzner or Israel Kirzner entrepreneurship

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Part II:  Profiles of Entrepreneurs

Recent reports by the Global Entrepreneurship Monitor (GEM) give details on the numbers and demographics of entrepreneurs in several countries; we focus specifically on the United States.

Number of Entrepreneurs in U.S.

There appear to be several ways to measure the number of entrepreneurs in the United States.  Included here are statistics from the Global Entrepreneurship Monitor and the United States Bureau of Labor Statistics.  While the data is not directly comparable because of varying reporting methods, the trends are revealing and report common themes.  We can quickly see that, in recent years, sole proprietors are on the rise in the United States.  Even after the technology boom of the late 1990’s, the number of individuals involved in entrepreneurship is increasing. 

Global Entrepreneur Monitor

According to the Global Entrepreneur Monitor, in each of the following years, these percentages of adults (between 18 and 64) were engaged in entrepreneurial activity[18]:

United States Census Data

A review of the United States Census Bureau statistics reports that approximately 70% of all businesses fall into the “Non-employer” category, which includes very small, single employee (i.e. the business owner), “mom and pop” businesses who are typically missed in other business reporting statistics but are very important to the economy.

Note the continuing increase in total non-employee businesses and especially the continuing increase in sole proprietorships.  The increase in sole proprietorships is particularly interesting when we consider that the normal business cycle is (1) build a business on one’s own, (2) grow it so that it must employ workers (i.e. forcing it out of this Census category), and (3) incorporate it. [19]

Demographics of U.S. Entrepreneurs

The majority of entrepreneurial firms are started and owned by men and by individuals between the ages of 25 and 34 (regardless of gender). 

The difference in percentages of entrepreneurs by gender, however, is not very substantial.  Of the roughly 13% of adults between 18 and 64 years of age who were involved in entrepreneurial activities during 2000 through 2003, approximately 8% were men and 5% were women.  This statistic is almost equal to data for 2000 exclusively, where men accounted for just over 8% and women just over 4%, therefore, we do not see a significant change in this trend. 

For the time period of 2000 through 2003, it is interesting to note that even though individuals in the 24-35 age bracket are most likely to be involved in entrepreneurial activities (i.e. 4 of the 13 %), their slightly older counterparts (i.e. 35-44 and 45-54) are almost equally likely to launch a business as they account for another 3% each.[20]

The clear message from this data is that regardless of gender or age, if a person has a good entrepreneurial idea and executes it well, he can become an entrepreneur.

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Entrepreneurship Trends

Profiles of Entrepreneurs

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Part III:  The Beginning of Entrepreneurship

At the highest summary level, entrepreneurship evolved as ownership of property transferred from state to private ownership, causing:

·        A landlord to rent his land to others;

·        More owners and more tenants/occupants to control the land and production from the land; and

·        An economy to develop as competition, exchange, price, and money become prevalent.[21]

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Part IV:  Role of the Entrepreneur in Economic Growth

The Kauffman Center for Entrepreneur Leadership reports a strong correlation (> 0.7 in 2000 and increasing since) between entrepreneurial activity and gross domestic product (GDP).  In this section, we will examine the intuition behind that the Center’s report linking the economy to entrepreneurship.[22]

The Entrepreneurship – Economy Relationship

It is intuitive to think that entrepreneurship and economic growth are interrelated since economic growth depends on consumers’ and businesses’ views the production, distribution, and consumption of goods and services.  We can take a simplistic view of The Economy to understand the continuous interrelationship.

Forces Driving the Entrepreneur

It is somewhat difficult to determine whether the economic condition drives entrepreneurship or whether entrepreneurship boosts the economy.  Is it that during hard economic times, innovation is sparked, jobs are created, and the economy is stimulated?  Or is it that during strong economic times, resources are available for research, resources are used for innovation, and the economy sustains? 

It may depend on the type of entrepreneur.  While several reasons that people start firms exist, the Global Entrepreneurship Monitor identifies two that are relevant to this discussion:  the “opportunity entrepreneur” and the “necessity entrepreneur”.  As the names imply, each type of person starts his own firm for a different reason.  The opportunistic entrepreneur attempts to capitalize on an apparent profit making opportunity, while the necessity entrepreneur starts a business simply to survive because he cannot find work that suits his needs.[24]  Each has an important role in economic growth.

The Importance of the Entrepreneur

Recalling our definitions of an entrepreneur and combining the views described in the previous section, we can define an entrepreneur as a person who has specialized talents in particular functions or industries; who applies judgment while finding and combining resources to undertake novel or complex business situations; and who assumes the risk of earning a profit from that situation.  

Economic growth relies on this entrepreneur to bring specialized knowledge into a system that doesn’t currently exist[25] and bring together innovation needs and innovation gaps.[26]  Because entrepreneurs will take risks where others – both individuals and firms – may not, they are vital to continued stimulation of the economy.

Employment

Both types of entrepreneurs contribute to employment

·        The necessity entrepreneur creates his own employment because he could not find satisfactory employment in the control of others.

·        The opportunity entrepreneur creates new jobs that result from new products and services.

Productivity

The entrepreneur contributes to productivity in a variety of ways:

·        Developing new inventions that increase the production capacity of current systems and processes, for example, technology that automates or replaces the need for manual labor

·        Creating innovations that solve previously unsolved problems

Investment and Consumption

On both the business investment and the consumer spending side, the entrepreneur plays an obviously vital role. 

·        As employment increases, productivity gains create more expendable resources by consumers. 

·        As consumer needs increase, business owners may invest more heavily in capital equipment to meet demand

The Entrepreneur in a Down Economy

In an economy where private ownership is prevalent, competition remains strong and resources remain scarce.  Therefore, our interrelationship cycle remains in motion[27] and needs will continue to drive innovation. 

The question remains, does the person become an entrepreneur out of necessity (perhaps in a down economy) or to capture the benefits from an apparent business opportunity (perhaps in an up economy)?  

In our current down economy (2000 - early 2003) certain forces, such as corporate actions, can drive people to leave their jobs (sometimes unwillingly through layoffs and sometimes willingly in response to work-life balance desires).  This surge of unemployment may cause individuals to capitalize on the next wave of technological advances, e.g. nanotechnology and biotechnology, through entrepreneurship, especially as the economy begins to come back.

Some experts say that jobs will follow growth eventually.  While we do not know where to find the next internet boom of the 1990’s, we are certain that Schumpeter’s ideas of creative destruction are alive and well. Accordingly, we anticipate new innovations to generate work for the unemployed.  According to Kevin Horan, we are in a “painful” waiting period[28] while we depend on entrepreneurs to do this.

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Economics and entrepreneurship

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Part V:  Role of Government Support in Entrepreneurship

Views on the Importance of Government Support

In order for entrepreneurs to have any impact, they must be given an environment that is conducive to entrepreneurship.[29]  Carl Schramm, president and CEO of the Kauffman Foundation is quoted as saying, “Government can either fuel entrepreneurs or stop them in their tracks.”[30]

Most of the research agrees that entrepreneurship is necessary to fuel struggling economies and that government incentives are necessary to entice people into entrepreneurship, which in turn creates jobs, innovate to improve lives, and contribute to economic growth.[31]

During the time period of 1945 – 1970, the government had adequate incentives for entrepreneurs.  During the 80’s and the 90’s, many of these incentives were retracted; therefore, this started the end of the entrepreneur.[32]

Government Resources for the Entrepreneur

Currently, however, we have been able to identify numerous government sponsored programs to help entrepreneurs get started.  Several of these resources, at both the national certain states’ level, are briefly described below.

United States Small Business Administration

In 1953, the Small Business Administration (SBA) was founded.  It was the result of several predecessor agencies and carried forward a philosophy to stimulate economic growth through providing aid to small businesses. 

The SBA believes in small business because it is “swifter, more flexible, and often more daring than big businesses” and “where the innovations take place”.  The SBA attempts to keep the American Dream alive through providing inexpensive loans, grants, and other resources.[33]  Visit the SBA at http://www.sba.gov/index.html.

State Agencies for Small Businesses

HCM Publishing has compiled a comprehensive list of agencies and administrations for each state; these agencies provide a wide variety of services, ranging from simply setting up the new business to offering tax incentives and low interest loans for new businesses.  Visit this list of links at http://www.hcmpublishing.com/State-by-State-Business-Resources.html.

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