entrepreneur

What is Entrepreneurship?

Foss and Klein dedicate the second chapter of their book Organizing Entrepreneurial Judgment: A New Approach to the Firm to putting forth the best definition of entrepreneurship. Although entrepreneurship studies is one of the fastest growing fields in colleges and universities around the world, FK argue that there is still much work to be done in defining the entrepreneur and clarifying how he relates to the firm. They explain that both in the economics and strategic management literature, a realistic understanding of entrepreneurship has been crowded out by neoclassical economics with its assumptions of perfect competition and production-functions which treat the firm as acting according to a pre-determined path.

Yet in real life, entrepreneurs within different firms are not in perfect competition and do not have accurate production curves that they can passively follow. Rather, they must take actions which they feel will lead to the best outcomes for the firm.

Foss and Klein draw on the Austrian school of economics view of heterogenous capital goods and an active, thinking entrepreneur to establish their definition of entrepreneurship. They explore seven different conceptions of entrepreneurship, discussing each and how they connect entrepreneurship with the firm. FK conclude that a judgment approach to entrepreneurship is the most fitting and sound approach to the subject. In the following I will summarize their discussion of these 7 approaches:

1) Entrepreneurship as small-business management:

In this approach, entrepreneurship is strictly linked with firms that qualify as small businesses. FK state, “it deems ‘entrepreneurial’ virtually all aspects of small or new business management, while excluding the identical tasks when performed within a large or established business.” This structural approach to entrepreneurship is one of the weakest according to FK yet still holds influence among colleges and universities today.

2) Entrepreneurship as imagination or creativity:

When defined by personal, psychological characteristics such as imagination and creativity, entrepreneurship becomes “a specialized activity that some individual are particularly well-equipped to perform.” Using this conception, entrepreneurship has no observable connection to the theory of the firm. The services of imaginative or creative people could be purchased when necessary by the firm. This conception leaves one wanting further explanation as well. FK pose the question that if a founder of a firm does not have a strong sense of imagination or creativity, then is he really not an entrepreneur?

3) Entrepreneurship as innovation:

This conception of entrepreneurship was championed by economist Joseph Schumpeter. He argued the entrepreneur introduces “new combinations” of ideas and resources and dynamically shakes up the economy out of its previous equilibrium state. Schumpeter called this process “creative destruction”. The entrepreneur is the source of economic change. In this conception, entrepreneurship is only demonstrated within the firm when it introduces new products, processes, or strategies. The regular day-to-day operation of the firm has nothing to do with entrepreneurship. The firm’s nature and structure has no effect on the level of entrepreneurship. Thus the connection between entrepreneur and firm is weak.

4) Entrepreneurship as alertness to opportunities:

This conception is most attributed to economist Israel Kirzner. FK argue it has come to influence management literature on entrepreneurship more than any other. “Opportunities” have come to be defined as “situations in which resources can be redeployed to create value through various forms of arbitrage.” Entrepreneurs are characterized as having special knowledge or insight that no one else has. According to the conception, entrepreneurs only need to be aware of profit opportunities. They do not need to own assets. Since they are merely exercising privileged knowledge, they are neither facing uncertainty nor necessarily bearing any risk. FK explain, “In Kirzner’s formulation, the worst that can happen to an entrepreneur is the failure to discover an existing profit opportunity. Entrepreneurs either earn profits or break even, but it is unclear how they suffer losses.” In this conception, entrepreneurs do not need a firm to be entrepreneurs.

5) Entrepreneurship as the Ability to Adjust:

This is the approach of Nobel Prize-winning economist Theodore Schultz. This approach takes assumes that innovation is occurring in the economy and measures entrepreneurship by how people adjust to large changes in the economy. Entrepreneurship is defined as “the ability to reallocate one’s resources in response to changing circumstances.” Schultz argued that entrepreneurial ability is a resources with an actual market price and quantity. By this conception, it is not only implied but overtly asserted that entrepreneurship could simply be purchased by firm management. Management could purchase the services of entrepreneurs during times of great change. Beyond that, there is no real connection between the entrepreneur and the firm.

6) Entrepreneurship as Charismatic Leadership:

This conception is heavily influenced by Max Weber. Entrepreneurship is defined as “the ability to articulate a plan, a set of rules, or a broader vision, and impose it on others.” Successful entrepreneurs must be excellent communicators and generate a following. FK’s main critique of this conception is that it speaks only to one personal characteristic and says nothing about the physical assets which an entrepreneur controls. It says nothing of how he makes decisions about those assets.

7) Entrepreneurship as Judgment:

This is the view which FK come to adopt. Entrepreneurship is defined as “judgmental decision-making under conditions of uncertainty.” Judgment is defined as “decisive action about the deployment of economic resources when outcomes cannot be predicted according to known probabilities.” In this conception, the entrepreneur is an active, creative agent. He is not passively identifying opportunities that he is aware of, but rather creating new opportunities by his judgment. Decision making under uncertainty is the qualifying function of entrepreneurship whether it involves imagination, creativity and leadership or not. FK argue that there is no market for this judgment and therefore entrepreneurs must establish firms as vehicles to perform their function in the economy. The definition of judgment implies that entrepreneurs own and manage assets. Foss and Klein draw most heavily from economists Frank Knight and Ludwig von Mises to explain entrepreneurship as judgment.

To conclude my summary on chapter two, I will quote a passage from FK which explains how an understanding of entrepreneurship as judgment links entrepreneurship with the firm and gives a fuller understanding of both:

“The firm…is the entrepreneur and the assets he owns, and therefore ultimately controls. The theory of the firm is essentially a theory of how the entrepreneur exercises his judgmental decision-making-what combinations of assets will he seek to acquire, what (proximate) decisions will he delegate to subordinates, how will he provide incentives and employ monitoring to see that his assets are used consistently with his judgments, and so on.”

In chapter three, we will explore more deeply the contrast between entrepreneurship conceived as opportunity discovery and entrepreneurship as judgment.

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