Theories of entrepreneurship are basically underlying principles that:

§  Explain entrepreneurship

§  Predict/forecast/foresee entrepreneurship activity

§  Provide normative guidance i.e. provides guidance for practice by providing the right action in particular circumstances.

A good working entrepreneurship theory would:

§  Explain why and how entrepreneurs come into existence.

§  Explain or predict conditions under which entrepreneurship talents should be employed.

§  Address issues that relate to the supply and demand for entrepreneurship.

§  Deal with type of resources needed to start a new venture.

A good theory should also meet the criteria of:

§  Validity- can it be verified through empirical studies.

§  Accuracy- how accurate is it in describing the observable phenomena.

§  Robustness-can it be applied across a range of specific situations or environments or populations.

 

Entrepreneurship Theories in detail

The following are some of the theories that explain the concept of entrepreneurship:

§  Social cultural theories

§  Economic theories

§  Finance theories

§  Personality/ psychological theories

§  Networking theories

1. SOCIAL CULTURAL THEORIES

§  Entrepreneurship is passed down from generation to generation by way of emulation or copying of an entrepreneurial spirit in the family/society

§  The theory attempts to link entrepreneurship to the larger social cultural contents.

§  The socialization that one goes through defines his role as an entrepreneur e.g. early childhood experiences, for instance working in a family business.

§  The theory states that many entrepreneurs come from social environment that could be described as deprived: their childhood were filled with poverty and parental neglect.

§  Entrepreneurs grow up in a world where the dominant themes concern desertion, death and neglect. Such an upbringing causes an individual to be highly impulsive, reject authority figures and have persistent feelings of rejection and isolation.

§  Individuals who grow up in these environments are motivated to take control over what they consider to be a hostile and uninviting world. They create business that they can control.

§  Entrepreneurs come from families where the father or mother was self employed.

§  Entrepreneurs come from backgrounds where family support for such careers is available.

§  Race and culture play significant roles in influencing entrepreneurial careers. Race and culture may provide networking and support to the would-be entrepreneurs.

§  A people’s belief/religion systems, cultural values, social structures are the basis of entrepreneurial behavior.

 

2. ECONOMIC THEORIES

§  Businesses emerge due to efficient utilization of factors and production. The key person, the entrepreneur, brings about more and more efficient use of the existing resources.

§  The theory focuses on the nature of innovation and new production processes.

§  These theories view entrepreneurs as agents of change; they exploit new opportunities.

§  The theories recognize that markets are continually being pushed away from equilibrium by change in the environment which generates new opportunities.

§  Wherever there is this disequilibrium entrepreneurs bring the world back to equilibrium by relocating resources to capture these profits.

3. FINANCE THEORIES

§  Focuses on capital and financial markets and examines a range of factors that relate to the supply of capital to new ventures.  People will start businesses if capital is available.

§  Availability of surplus funds or propensity to save creates entrepreneurship.

4. NETWORKING THEORIES

§  Entrepreneurs come into existence because of availability of existence networks.

§  Strong social ties- informal or formal which supports the development of entrepreneurship.

§  The network can consist of suppliers, financers, markets, information networks, networks for solving business problems

5. PSYCHOLOGICAL THEORIES

§  Focuses on the personality of the entrepreneur.

§  People start business because they posses certain characteristics-e.g. need to achieve, internal locus of control, tolerance of ambiguity, risk taking.

§  Certain psychological traits predispose/prompt/influence people to join or undertake entrepreneurship.

§  The supply of entrepreneurship depends on individuals psychic needs for achievement rather than the desire for money.