Theories of Entrepreneurship

3) Need for Achievement Theory of McClelland

According to McClelland the characteristics of entrepreneur has two features – first doing things in a new and better way and second decision making under uncertainty. McClelland emphasizes achievement orientation as most important factor for entrepreneurs. Individuals with high. Achievement orientation is not influenced by considerations of money or any other external incentives. Profit and incentives are merely yardsticks of measurement of success of entrepreneurs with high achievement orientation. People with high achievement are not influenced by money rewards as compared to people with low achievement. The latter types are prepared to work harder for money or such other external incentives. On the contrary, profit is merely a measure of success and competency for people with high achievement need. Professor David McClelland, in his book The Achieving Society, has propounded a theory based on his research that entrepreneurship ultimately depends on motivation. It is the need for achievement, the sense of doing and getting things done, that promote entrepreneurship. According to him, N-Ach is a relatively stable personality characteristic rooted in experiences in middle childhood through family socialization and child-learning practices which stress standards of excellence, material warmth, self-reliance training and 30 low father dominance.

According to David McClelland, regardless of culture or gender, people are driven by three motives:

  • Achievement,
  • Affiliation
  • Power

Need for Achievement

A drive to excel, advance and grow. The need for achievement is characterized by the wish to take responsibility for finding solutions to problems, master complex tasks, set goals, get feedback on level of success.

 Need for Affiliation

A drive for friendly and close inter-personal relationships. The need for affiliation is characterized by a desire to belong, an enjoyment of teamwork, a concern about interpersonal relationships, and a need reduce uncertainty.

Need for Power

 A drive to dominate or influence others and situations. The need for power is characterized by a drive to control and influence others, a need to win arguments, a need to persuade and prevail.

 McClelland found that certain societies tended to produce a large percentage of people with high achievement. He pointed out that individuals, indeed whole societies that possess N-ach will have higher levels of economic well-being than those that do not. McClelland’s work indicated that there are five major components to the N-ach trait: (a) responsibility for problem solving, (b) setting goals, (c) reaching goals through one’s own effort, (d) the need for and use of feedback, and (e) a preference for moderate levels of risk-taking. The individual with high levels of need achievement is a potential entrepreneur. The specific characteristics of a high achiever (entrepreneur) can be summarized as follows:

(i)  They set moderate realistic and attainable goals for them.

(ii) They take calculated risks.

(iii) They prefer situations wherein they can take personal responsibility for solving problems.

(iv) They need concrete feedback on how well they are doing.

(v) Their need for achievement exist not merely for the sake of economic rewards or social recognition rather personal accomplishment is intrinsically more satisfying to them.

According to McClelland, motivation, abilities and congenial environment, all combine to promote entrepreneurship. Since entrepreneurial motivation and abilities are long run sociological issues; he opined it is better to make political, Social and economic environments congenial for the growth of entrepreneurship in underdeveloped and developing countries.

4) Theory of Profit by Knight

This theory is propounded by Knight. According to this theory, profit is reward for bearing uncertainty. Uncertainty is due to unforeseeable or non-insurable risk. A key element of entrepreneurship is risk bearing. Prof. Knight and John Staurt Mill saw risk bearing as the important function of entrepreneurs. Some important features of this theoryare as follows:

i. Risk creates Profit: According to the risk-bearing theory, the entrepreneur earns profits because he undertakes risks.

ii. More Risk More Gain: The degree of risk varies in different industries. Entrepreneurs undertake different degrees of risk according to their ability ad inclination. The risk theory proposes that the more risky the nature of business, the greater must be the profit earned by it.

iii. Profit as Reward and Cost: Profit is the reward of entrepreneur for assuming risks. Hence, it is also treated as a part of the normal cost of production.

iv. Entrepreneur’s Income is Uncertain: He identifies uncertainty with a situation where the probabilities of alternative outcomes cannot be determined either by a priori reasoning or by statistical inference. A priori reasoning is simply irrelevant to economic situation involving a unique event. This theory summarizes that profit is the reward of an entrepreneur effort which arises for bearing non insurable risks and uncertainties and the amount of profit earned depends upon the degree of uncertainty bearing. Knight argues that business enterprises the level of uncertainty can be reduced through ‘consolidation’. Consolidation is to uncertainty is what insurance is to risk; it is a method of reducing total uncertainty by pooling individual instance. The elasticity of the supply of self-confidence is the single most important determinant of the level of profit and the number of entrepreneurs.

5) Hagen’s Theory of Entrepreneurship

One important theory of entrepreneurial behaviour has been propounded by Hagen, which is referred to as the withdrawal of status respect. Hagen has attributed the withdrawal of status respect of a group to genesis of entrepreneurship. Hagen considers the withdrawal of status, of respect, as the trigger mechanism for changes in personality formation. Status withdrawal occurs when members of some social group perceive that their purposes and values in life are not respected by the groups in the society they respect, and whose esteem they value. Hagen postulates four types of events, which can produce status withdrawal:

  • Displacement of a traditional elite group from its previous status by another traditional supply physical force.
  • Denigration of valued symbols through some change in the attitude of the superior group.
  • Inconsistency of status symbols with a changing’ distribution of economic power.
  • Non-acceptance of expected status on migration to a new society.

 Hagen further postulates that withdrawal of status respect would give to four possible reactions and create four different personality types:

(a)Retreatist: Entrepreneur who continues to work in society but remains indifferent to his work or status.

(b)Ritualist: One who works as per the norms in the society hut with no hope of improvement in the working conditions or his status.

 (c)Reformist: One who is a rebellion and tries to bring in new ways of working and new society.

(d)Innovator: An entrepreneur who is creative and try to achieve his goals set by himself.

 According to Hagen, the creativity of a disadvantaged minority group is the main source of entrepreneurship. He developed this thesis from the case of the samurai community of Japan. Traditionally, this community had enjoyed a high status of which it was deprived later. To regain this lost prestige, it became more active and vigorous and gave rise to many entrepreneurs. McClelland supported this thesis by admitting that a suppressed community had more creativity. He said that Jains could be successful entrepreneurs because of their consciousness of their majority and superiority complexes. McClelland had modified Hagen’s thesis slightly in order to explain such cases. He stated that the subordination of minority group could arouse achievement motivation in its members but its extent depended upon the initial level of motivation and the means available to the group to active its achievement motivations.

Theories of Entrepreneurship

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