University of Bahrain
College of Business Administration
MGT 239: Small Business
Introduction to the Main Economic Theories of
Entrepreneurship
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The functional role of the entrepreneur
Commonly, economic theories of entrepreneurship are reviewed on the
basis of the functional role of the entrepreneur These include:
 The entrepreneur as a risk/uncertainty bearer
 The entrepreneur as an innovator
 The entrepreneur as arbitrageur
 The entrepreneur as resource coordinator
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1. The Entrepreneur as Risk/ Uncertainty Bearer
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Richard Cantillon (1730) is credited with making "entrepreneur" a technical
term.
He presented the entrepreneur as a bearer of uncertainty.
In fact, Cantillon expands his definition to cover some individuals who are
probably the most unlikely to be entrepreneurs. "
Like Cantillon, Knight (1921) introduced the entrepreneur as a manager of
uncertainty who is motivated by expected profit.
Under uncertainty, decisions are made in ignorance. Actions are based on
opinion rather than knowledge. It is the role of the entrepreneur to predict
consumer demand and estimate the supply of products. He is an entrepreneur
because he is willing to accept the uncertain results of his decision.
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The Entrepreneur as Risk/ Uncertainty Bearer
• An important contribution of Knight is his distinction between risk and
uncertainty.
• Risk is defined as a random event with a known distribution.
• On the other hand, the probability distribution associated with
uncertainty is totally unknown.
• Uncertain events do not repeat themselves with sufficient regularity,
so it is not possible to compute their probability.
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2. The Entrepreneur as Innovator
• Schumpeter (1934) believes innovation to be the main function of the
entrepreneur.
• “… (1) The introduction of a new good -- that is one of which
consumers are not yet familiar -- or of a new quality of a good. (2) The
introduction of a new method of production, that is one not yet tested
by experience ... (3) The opening of a new market, that is a market
into which the particular branch of manufacture the country in
question has not previously entered, whether or not this market has
existed before. (4) The conquest of a new source of supply of raw
materials or half manufactured goods ... (5) The carrying out of the
new organisation or of any industry...”
• Thus, innovation is a radical change, it is not a slight or incremental
change.
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The Entrepreneur as Innovator
• Entrepreneurship is not only a function of an individual’s desire for
profit but also a desire to satisfy personal, non-monetary needs.
• (….entrepreneurship is limited to those who have “... the desire to find
a private kingdom, the will to conquer, the joy of creating, of getting
things done, or simply exercising one’s energy and ingenuity.”
(Schumpeter, 1934: 93).
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3. The Entrepreneur as Arbitrageur
• Kirzner (1979): entrepreneur is someone who is alert to profit
opportunities and ready to exploit them.
• Alertness or the lack of it explains why some individuals become
entrepreneurs while others don’t ...
• Pred’s (1967) theory is similar to that of Kirzner; however, while
Kirzner stresses the alertness to information, Pred emphasises the
ability to make use of it.
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3.The Entrepreneur as Arbitrageur
• Pred argues that the quantity and quality of information held by
individuals is a function of:
• Their geographic characteristics (place of residence and daily field of
movement)
• Their personal attributes. (In diverse ways, “sex, age , income,
education, occupation, marital status, political, religious and other
affiliation
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4. The Entrepreneur as Resource Coordinator
• Say (1830) introduces the entrepreneur as resource allocator.
• entrepreneurship is a function of financial position, "connections"
and various personal qualities.
• Smith (1976) focus is mainly on the individual characteristics of the
entrepreneur. He draws a distinction between three types of
entrepreneurs:
 the "craftsman“
 the "opportunistic"
 the "boffin“
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4. The Entrepreneur as Resource Coordinator
• The craftsman entrepreneur has limited and narrows education.
• In his prior employment job, he usually holds the most senior shop
floor position of supervision.
• His dislike for managers makes him feel that the company is badly run
he could do better if he were to run a business of his own.
• Once he establishes a business, he will resent outside control and is
unlikely to seek external financing through loans.
• One of the key features of the craftsman entrepreneur is that he is
not motivated towards business growth.
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The Entrepreneur as Resource Coordinator
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The “opportunistic" entrepreneur is the opposite of the craftsman in every
way.
In terms of education, the opportunistic entrepreneur usually has a degree.
He uses his education opportunities to gain a wide range of experience that
will be useful in business.
Through his employment experience, he gains a wide range of skills in areas
such as marketing and administration.
Once he starts a business, his experience in management gives him useful
contacts which he utilises in his own business.
The “opportunistic” entrepreneur is happy to raise external finance. He feels
that the business world is open-ended and as such is highly motivated to
achieve growth.
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