Entrepreneurship
What is entrepreneurship?
Many definitions of entrepreneurship can be found in the literature describing business processes. The earliest definition of entrepreneurship, dating from the eighteenth century, used it as an economic term describing the process of bearing the risk
of buying at certain prices and selling at uncertain prices. Other, later commentators broadened the definition to include the concept of bringing together the factors of production. This definition led others to question whether there was any unique entrepreneurial function or whether it was simply a form of management. Early this century, the concept of innovation was added
to the definition of entrepreneur-ship. This innovation could be process innovation, market innovation, product innovation, factor innovation, and even organisational innovation. Later definitions described entrepreneurship as involving the creation of new enterprises and that the entrepreneur is the founder.
Nowdays there is no standart definition of entrepreneur in economic theory, but are identified by three possible elements of the entrepreneural function:
1) The organisation of production
2)Risk
3)Inovation
The organization of production
The entrepreneur is the factor of production which brings together the other factors in the production process. Land and capital are inert objects. Entrepreneur buys land, hires labour and organizes all three factors to produce goods and services for sale, so is seen as the key to production in economy. It could be argued that if there were no entrepreneurs, there would be no production.
Risk
Production is a risky process. In many industries, land, labour and capital have to be purchased before there is any certainty that the finished product will be sold. For instance, a car manufacturer is likely to make cars without there being any firm orders for their sale. If it makes too many cars, they will have to be stockpiled for sale at a later date. Too big a stockpile and too few orders could result in the bankruptcy of the firm. So firms face uncertainties and have to take risks. Some risks are quantifiable and can be insured against. A firm can insure itself against the risk of fire damage or theft. However, other risks such as whether a new production technique will lead to a reduction in costs, are unquantifiable and therefore cannot be insured against.
Entrepreneurs are those who take unquantifiable risks and suffer the consequences if they get it wrong.
Inovation
Entrepreneur is someone who innovates within an organization. New products are being launched all the time but evidence suggest that only a few will be successful. New productin techniques are also being constantly pioneered with varying degrees of success.
Who are entrepreneurs?
a) The most likely classified as entrepreneurs are owner managers of small firms because they combine all these three entrepreneurial functions. He organize production because he is a manager of the company. He takes risks because he has put money into the firm to start it and is producing innovative products which could well fail. This person is likely to have sufficient capital to be able to finance the setting up to the firm, have total control over the organization of production and be exposed to
considerable risk if the enterprise fails.
b) Managers, if they take risks on behalf of their companies and if they are responsible for innovation. A manager of a company may have no shares in the company for which he works, so he does not risk own capital. He takes decisions which involves an uncertain outcome. For example if a firm start to produce a new flavour of yoghurt. The flavour might be very successful or not, so the outcome of a decision is uncertain. Managers of large companies can be as entrepreneurial as owner-managers of
small companies if they are responsible for pushing their companies into new areas. If managers work together as a team and innovate or take risks, then the group is entrepreneurial.
c) Shareholders because risk their capital. They are backing change and may give advice to the person setting up the company. If the company fails, shareholders lose their money. On the other hand, they are unlikely to be involved in organizing production or innovation in the firm. So some economists argue that capitalists are in some senses entrepreneurs, others disagree.
What is the reward for entrepreneurship?
Profit
is the revenue left over after the other factors of production have been paid. If the entrepreneur is successful, there will be a large residue after wages, interest and rents have been paid. If the entrepreneur is unsuccessful, profits will be negative and the firm could go bankrupt. But not all profit is the reward for entrepreneurship. Only abnormal or pure profit can be seen as the payment which entrepreneurs receive. In normal profit is opportunity cost of factors such as labour and capital which receive no money payment for their use.
What is Economic and entrepreneuship welfare?Welfare - practical or financial help that is provided, often by the government, for people.
The role of entrepreneurship and an entrepreneurial culture in economic and social development has often been underestimated. Over the years, however, it has become increasingly apparent that entrepreneurship does indeed contribute to economic
development. A number of arguments have been put forward as to why entrepreneurs play such an important role in the economy:
Innovation: Without innovation, the economy would stagnate. There would be no improvements in living standarts. Innovation is therefore vital if economic welfare is to increase.
Job creation: Sucessful entrepreneurs create jobs. Also small firms can help ease the unemployment problems.
Wealth creation: Entrepreneurs create wealth by their activities. The small firms of today will become the large successful firms tomorrow.
But innovation can lead to failure as well as success. For example in UK and USA, small firms entrepreneurs has been seen as
a folk hero, have had lower economic growth rates than economies such as Japan and Germany where greater stress is placed on team work and co-operation.
Creating an enterprise culture
It is common to equate entrepreneurship with the small business sector ofthe economy. Many of the claimed advantages of the entrepreneurial spirit are in fact the possible advantages of having an active small business sector in economy. On this view, the
entrepreneur is the owner manager of a small company. So government can best support the creation of an entreprise culture
by measures which will support the creation and expansion of small firms in the economy. Economic theory, however, need have nothing to do with small firms. Both innovation and risk taking can be as much if not more the concern of large firms as small firms.
How can an entrepreneurial spirit be created in large firms?
In recent years, there has been a move towards paying managers by results. Some managing directors, for instance, are paid a basic salary but can earn far more if their company achieves a ange of objectives. These include increases in sales, increases in profits, increases in the share price of the company or reductions in the form of cash or shares in the company. The idea is to make managers who are employees of the firm accept more risk. If the firm does well, the managers will do well. If the firm does badly, so too do the managers.
ANDERTON ALAIN: Economics (Second Edition). Oxford, Causeway Press Limited 1995 -
