Module 1

A PERSPECTIVE ON ENTREPRENEURSHIP

Entrepreneurship is a very important component of the capitalist economy like the

Philippines. It's strives the economic system that supports innovation and handwork. When
Entrepreneurs become successful, the nation is immensely benefitted. What is
Entrepreneurship and how does it affect the economic well-being of many people? What is
the task of the Entrepreneur regarding economic development? This chapter attempts to
provide answers to concerns like those stated above.

At the end of the unit, the students should be able to:

1. Understand the concept of entrepreneurship;
2. Identify various people and their definition of entrepreneurship
3. Compare and contrast various views of people regarding entrepreneurship
4. Identify and elaborate entrepreneur’s task
5. Know the different traits of entrepreneurs
6. Identify the contributions of entrepreneurs to the economic development

What is Entrepreneurship?
Entrepreneurship according to Cantillon,
The term entrepreneur, which most people recognizes means as someone who organizes
and assumes the risk of a business in return for the profits, appears to have been introduced by
Richard Cantillon (1697-1734), an Irish economist of French descent. The term came into much
wider use after John Stuart Mill popularized in his 1848 classic, Principles of Political Economy,
but then all disappeared from the economics literature by the end of the nineteenth century.
The reason is simple. In their mathematical models of economic activity and behavior,
economist began to use the simplifying assumption that all people in an economy have perfect
information. That leaves no role for the entrepreneur. Although different economist have
emphasized different facets of entrepreneurship, all economist who have written about it agree
that at its core entrepreneurship involves judgment. But if people have perfect information, there
is no need for judgment. Fortunately, economist have increasingly dropped the assumption of
perfect information in recent years. As this trend continues, economist are likely to allow in their
models for the role of the entrepreneur. When they do, they can learn from the past economist,
who took entrepreneurship more seriously.
According to Cantillon's original formulation, the entrepreneur is a specialist in taking on
risk. He “insures” workers by buying their products (or their labor services) for resale before
consumers have indicated how much they are willing to pay for them. The workers receives an
assured income (in the short run, at least) while the entrepreneur bears the risks caused by the
price fluctuations in consumer markets. To illustrate, a room attendant or a waiter of a hotel gets
paid by the “entrepreneur” in exchange for the services rendered. However, the “entrepreneur”
bears the risk. The risk would be if nobody would like to stay the hotel or people do not want to
dine out in the restaurant.

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Entrepreneurship according to Frank H. Knight
The idea of Cantillon was further refined by the U.S economist Frank H. Knight (1885-
1972), who distinguished between risk, which is insurable, and uncertainty, which is not. Risk
relates to recurring events whose relative frequency is known from the past experience, while
uncertainty relates to unique events whose probability can only be subjectively estimated. In case
of a restaurant owner, the risk is whether people would like to eat in that restaurant thus making
a profit.
Changes affecting the marketing of consumer products generally fall in the uncertainty
category. Individual tastes, for example, are affected by group culture, which, in turn, depends on
fashion trends that are essentially unique. Insurance companies exploit the law of large numbers
to reduce the overall burden of risks by “pooling” them. For instance, no one knows whether any
individual forty-year-old die in the next year. But insurance companies do know with relative
certainty how many forty year old in a large group will die within a year. Armed with this
knowledge, they know what price to charge for life insurance, but they cannot do the same when
it comes to uncertainties.
Knight observe that while the entrepreneur can “lay-off” risks much like insurance
companies do, he is left to bear the uncertainties himself. He is content to do this because his
profit compensates him for the psychological cost involved.
For Knight (1967) and Peter Drucker (1970) entrepreneurship is about taking risks. The
behavior of the entrepreneur reflects a kind of person willing to put his or her career and
financial security on the line and take risks in the name of an idea, spending much time as well as
capital on an uncertain venture. Knight classified there types or uncertainty.
 Risk, which is measurable statistically (such as the probability of drawing a red color ball
from a jar containing 5 red balls and 5 white balls).
 Ambiguity, which is hard to measure statistically (such as the probability of drawing a
red ball a jar containing 5 red balls but with an unknown number of white balls).
 True Uncertainty of Knightian Uncertainty, which is impossible to estimate or predict
statistically (such as the probability of drawing a red ball from a jar whose number of red
balls is unknown as well as the number of colored balls).
Entrepreneurship according to Joseph A. Schumpeter
Joseph A Schumpeter (1883-1950)
Took a different approach, emphasizing the role innovation. According to Schumpeter, the
entrepreneur is someone who carries out “new combination” by such things as introducing new
products or processes, identifying new export markets or sources of supply or creating new types
of organization Schumpeter presented a heroic vision of the entrepreneur as someone motivated
by the “dream and the will to found a private kingdom”; the “will to conquer; the impulse to
fight, to prove oneself superior to others”; and the “joy of creating”

In Schumpeter view the entrepreneur leads the way in creating new industries,, which in
turn, precipitate major structural changes in the economy. Old industries are rendered obsolete
by a process of “creative destruction” As the new industries compete with established ones for
labor, materials and investment goods, they on their higher costs because demand is switching to
new products. As the old industries decline, the new ones expand because imitators with
optimistic profit expectations based on the innovator's initial success continue to invest.
Eventually, overcapacity depresses profits and halts investment. The economy goes into
depression and innovation stops. Invention continues however, and eventually there is a
sufficient stock of unexploited inventions to encourage courageous entrepreneurs to begin

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innovation again. In this way Schumpeter used entrepreneurship to explain structural change,
economic growth and business cycles, using a combination of economic and psychological ideas.
Schumpeter was co concerned with “high level” kind of entrepreneurship that,
historically has led to the creation of railroads, the birth of the chemical industry, the commercial
exploitation of colonies and the emergence of the multidivisional, multinational firm. His
analysis left little room for the much more common, but no less import, “low level”
entrepreneurship carried on by small firms.
Entrepreneurship according to Hayek and Kirzner
The essence of this low-level activity can be explained by the Austrian approach of
Friedrich A. Hayek and Israel M. Kirzner. In a market economy, price information is provided
by entrepreneurs while bureaucrats in a socialist economy have no incentive to discover prices
for themselves entrepreneur in a market are motivated to do so by profit opportunities.
Entrepreneur provide price quotations to others as an invitation to trade with them. They hope to
make a profit by buying cheap and selling dear. In the long competitions between entrepreneurs
arbitraged away price differentials, but in the short run such differentials once discovered
generate a profit for arbitrageur.
The difficulty with the Austrian approach is that it isolates the entrepreneur form the
firm. It fits an individual dealer or speculator far better than it fits a small manufacturer or even a
retailer. In many cases (and in almost whether a salaried manager, too, can be an entrepreneur.
Frank Knight maintained that no owner would ever delegate a key decision to salaried
subordinate, because he implicitly assumed the subordinates cannot be trusted. Uncertainty
bearing, therefore, is inextricably vested in the owners of the firm’s equity, according to Knight.
But in practice subordinates can win a reputation for being good stewards, and even though
salaried, they have incentives to establish and maintain such reputations because their promotion
prospects depend upon it. In this sense, both owners and managers can be entrepreneur.
The title of entrepreneur should, however, be confirmed to an owner of manager who
exhibits the key trait of entrepreneurship noted above: judgment in decision making. Judgment is
a capacity for making a successful decisions when no obviously correct model or decision rule is
available or when relevant data is unreliable or incomplete. Cantillon's entrepreneur needs
judgment to speculate on future price movements, while Knight's entrepreneur requires judgment
because he deals in situations that are unprecedented and unique. Schumpeter's entrepreneur
needs judgment to deal with the novel situations connected with innovation.
The insights or previous economist can be synthesizes. Entrepreneur are specialist who
use judgment to deal with Novel and complex problems. Sometimes they own resources to
which the problems are related, and sometimes they are stewards employed by the owners. In
times of major political, social, and environmental change, the number or problems requiring
judgment increases and demand of entrepreneurs rises as a result. For supply to match demand,
more people have to forgo other careers in order to become entrepreneurs. They are encouraged
to do so by the higher expected pecuniary rewards associate ld with entrepreneurship, and
perhaps also by increases in the social status of entrepreneurs, as happened in the eighties.

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 Entrepreneurship refers to the economic activity who starts, manage and assume to risk
a business enterprise. The person who undertake Entrepreneurial activities is called
Entrepreneurs. The Entrepreneurs identifies an Economic need considers offering a business,
solutions proceed to assemble the resources and assume risk that the other succeeding or failing.
An example of this activities is properly shown on Table 1.

TABLE 1. AN EXAMPLE OF ENTEPRENEURSHIP ACTIVITY

Entrepreneur’s concern Problem at hand Entrepreneur’s Action

[Link] an economic need [Link] income families are not 1. Establish a high school
satisfied with the services education with higher standards
provided by high school in their than the current high schools are
area providing.
[Link] resources [Link] must be made 2. Acquire funds, hire people,
required available constructs buildings, and the
like.

[Link] risk 3. Venture must be made. 3. Prepare project study,

advertise, and maintain good
relationship with employees and
customers, among others.

Entrepreneurship and Economic Development

Economic Development is a scheme aimed at improving the living standards of the nation
citizenry. To achieve Economic Development goals, proper management of the following is
necessary:

1. Human resources (labor supply, education, discipline, motivation)

2. Natural Resources (land, minerals, fuel, climate)

3. Capital formation (machines, factories, roads and;

4. Technology (science, engineering, management, Entrepreneurship)

The effective and efficient utilization of the various resource elements contribute to the
Economic growth. This happens when the element of Entrepreneurship is performed well by the
players. The abundance of natural resources like fertile land, fuel, minerals and good climate is
plus factor but are not guarantees for positive economic development. There is a need of
Entrepreneur to perform the factors of harnessing the potentials of any of the elements
determining the right quality of Resources needed, and applying the elements at the right time.

The performance of entrepreneur, however, will depend much the support provided by
the government. Apart from the other obstacles, government restrictions limit the effectiveness
of entrepreneurs.

The Entrepreneurs task

If all the requirements in the capitalist economy are in place the Entrepreneur assume his
assigned role in the development of the economy. A review of the contributions of entrepreneurs
will reveal that no business, big or small started without the hand of the Entrepreneur. Even if
many of these business failed to survive, still a sizeable number developed and proceed to make

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 the capitalist Economy a viable concern. This made possible because the surviving enterprise are
responsible for providing the following;
1. Products and services of customers and producers,
2. Employment
3. Taxes
4. Demand for suppliers, products and services and;
5. Training facilities for future Entrepreneurs
An inspection of the array products offered for sale in a typical supermarket reveals a
wide choice provided to the consumer. When a consumer is making a decision on which brand of
soap he is going to buy, for instance, he will be choosing for many 10 different brands. Many
years ago his choice was limited to one or two brands. Much earlier, soap was not even available
for sale. The consumer had to produce his own requirement. What bought the consumer to the
situation where he has the luxury of choosing from many options? And this does not refer to
soap alone but other products as well. Services which were not previously available are now at
the back and call of the consumer. The fast food canteen at the corner, parcel delivery,
communications through cellphone, cable television, short term credit through credit card,
money remittance and the like, are among the many services made possible by the Entrepreneurs.
A review of the statistical reports prepared by the government shows that business organized by
Entrepreneurs employs millions of people.
The taxes paid to the government in the form of licenses, fees and permits applicable to
the enterprise as well as income taxes applicable to the employees and Entrepreneurs easily
amount to billions of pesos, the taxes collected are in turn in to development projects of the
government. The Entrepreneurs also made sure that that suppliers will ready market for their
products and services. The retailers, for instance assume the viability of big companies like San
Miguel Corporation and Pure foods Company, Hollow block manufacturers utilize the output of
big cement factories. VCD and DVD shops provide the necessary linkage between consumer and
producers of movies and recorded music. Lastly, Business enterprise provide a training ground
for future Entrepreneurs. A number of entrepreneurs were former employees of enterprising
persons, many of them used their acquired skills in starting new business. Some even improved
on the Entrepreneurial skills passed on to them.
Figure 1. Entrepreneurs Task.

Land Labor Capital

(Natural Resources) (Human Resources) (Financial Resources)

Entrepreneur

Product Process

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 Finished Goods
And Services

In the attempt to make profits the Entrepreneurs perform the following actions;
1. To supply the necessary capital
2. To organize production of buying and combining inputs like materials and labor;
3. To decide on the rate of output, in the light of his expectations about demand and;
4. To bear the risk inherent to the venture.
Any business enterprise must offer products and services to the buyers whether these
buyers are consumers or producers. The products and services will be sold to the buyers that be
bought or manufactured. In any case, there will be a need to hire services to employees, laborers
and managers. All of these will need funds which the Entrepreneurs will produce, in addition to
whatever fund reserves are acquired. The next specific function of the entrepreneur is to
assemble a production unit complete with manpower and equipment, the quality and quantity of
which have been predetermine by him. The Entrepreneur will also determine and make decisions
on the rate of output the firm must produce. This will have to be tied up with demand. Finally,
whatever risk is involved in the Entrepreneurial activity, he must suffer consequences of losses if
he fails, but he will enjoy the profits as rewards if he succeeds.
Entrepreneurship and Innovation
The freedom of competition afforded by the capitalist economy serves to drive to
Entrepreneur to innovate and get ahead of his competition lest if he is driven to the market.
Buyers of commodities have a tendency to patronize innovative offerings of any kind and if one
wants patronage, he must remember this motivation.
Innovation may be defined as the introduction of a new method, procedure, custom, device,
among others. Innovation could be any of the following;
1. New product
2. New process of production
3. Substitution of a cheaper material in an unaltered product.
[Link] of production, internal function, or distribution arrangement leading to increase
efficiency, better support for a given product or lower costs; or
5. Improvement in instruments or methods of doing Innovation. Innovation may also be viewed
as the last stage in an important process consisting of the following;
a. Invention- which refers to the discovery or devising of new products and processes.
b. Development- which refers to the process which the ideas and principles generated from the
stage of invention are embodied in concrete products and techniques; and
c. Innovation- which refers to the actual introduction of new products or process. Innovation, if
it must be made successful must provide value to the buyers over and above those offered by
competitors. To achieve this, innovation must reduce costs or improve the quality of products or
service less offered for sale.

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Examples of successful innovations are the following;
1. Cordless microphone
2. Microwave oven
3. Cellular phones
4. Kung fu fight scenes developed by Bruce Lee in the movies;
5. Karaoke music appliances;
6. Use of laser in the treatment of eye conditions; and
7. Use of computers by engineers and architects in the design of buildings.
New Ventures and Long Term Enterprises
A new venture cannot remain as such forever. The entrepreneur must develop it into a
small business or make it grow into a mature and bigger company if he is to recoup the cost of
opening a new venture and take advantage of the opportunities presented by a mature business.
The transition from a new venture to a successful long term enterprise consists of at least four
major stages. The stages are as follows;
1. Prestart-up stage;
2. Start-up stage;
3. Early growth stage; and
4. Late growth stage.
The prestart-up stage happens when the entrepreneur starts to question the feasibility of an
idea, product, or service. He seeks answers to questions regarding potential markets, production,
and financing. This is a very important stage that the entrepreneur must consider. If he errs in his
evaluation, he will fail before considerable growth is attained.
In the start-up stage, the following activities are undertaken;
1. Formation of the business;
2. Generation of necessary capital;
3. Purchase of facilities and equipment;
4. Constructing prototype products; and
5. Testing the market No full scale activity must be undertaken at this stage for the simple
reason that feasibility must be established and verified.
The early growth stage follows after establishing feasibility. Activities will be on a small
scale, i.e. selling to limited markets with limited resources. If losses occur, it will naturally be
limited also. If the enterprise is successful at this stage, the option to move to the next stage can
be exercised.
Rewards for Successful Entrepreneurs
Table 2. The factors of Production and their Rewards
Factors of Production Economic Reward Limiting Factor for Rewards
Received

Land Rent Supply and demand

Capital Interest Industry rates/government
Labor Wages/salary mandated rates
Entrepreneur profits Supply and demand
legislation
Skill of entrepreneur
Table 3. Innovation and its Possible Effects on Competing Firms

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 Entrepreneur 1 Entrepreneur 2 Entrepreneur 3

Year 1 introduce innovative Inactive Inactive

product
Year 2 reap moderate profits Introduce innovative product Inactive
Year 3 maximize profits reap moderate profits Introduce innovative product
Year 4 profits decline maximize profits reap moderate profits
Year 5 introduce innovative profits decline maximize profits
product profits decline

Entrepreneurship and business size

Too many people, entrepreneurship means running a small business. New business
ventures, however, can also be undertaken on a large scale. Both small and large businesses are
confronted by problems that are entrepreneurial in nature.
To effectively compete, businesses of whatever size must adapt innovative approaches to its
activities. Examples of innovations are the following;
1. Offering business services during Sundays and holidays.
2. Manufacture and sale of new products; and
3. Selling on a deferred payment scheme.
THE ENTREPRENEURS
Entrepreneurs have many of the same character traits as leaders. Similarly to the early great
man theories or leadership; however trait-based theories of Entrepreneurship are increasingly
being called into question. Entrepreneurs are often contrasted with managers and administrators
who are said to be more methodical and less prone to risk-taking. Such person-centric models of
Entrepreneurship have shown to be questionable validity not least as many real-life entrepreneurs
operate in teams rather than a single individuals. Still, a vast but now clearly dated literature
studying the entrepreneurial personality found that certain traits seem to be associated with
entrepreneurs:
 David McClelland (1961) describe the entrepreneur as primarily motivated by an
overwhelming need for achievement and strong urge to build.
 Collins and Moore (1970) studied 150 entrepreneurs and concluded that they are tough,
pragmatic people driven by needs of independence and achievement. They seldom are
willing to submit to authority.
 Bird (1992) sees entrepreneurs as mercurial that is prone to insights, brainstorms,
deceptions, ingeniousness and resourcefulness. They are cunning opportunistic, creative
and unsentimental.
 Cooper, Woo, & Dunkelberg (1989) argue that entrepreneurs exhibit extreme optimism
in their decision making processes. In a study of 2994 entrepreneurs they report that 81%
indicate their personal odds of success as greater than 70% and a remarkable 33% seeing
odds of success of 10 out of 10.
 Basinets and Barney (1997) claim entrepreneurs are prone to overconfidence and over
generalizations.
 Cole (1959) found there, are four types of entrepreneur: the innovator, the calculating
inventor, the over-optimistic promoter, and the organization builder. These types are not
related to the personality but to the type of opportunity the entrepreneur faces.

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Characteristics of Entrepreneurship
 The entrepreneur has an enthusiastic vision, the driving force of an enterprise.
 The entrepreneur's vision is usually supported by an interlocked collection of specific
ideas not available to the marketplace.
 The overall blueprint to realize the vision is clear, however details may be incomplete,
flexible and evolving.
 The entrepreneur promotes the vision with enthusiastic passion.
 With persistence and determination, the entrepreneur develops strategies to change the
vision into reality.
 The Entrepreneur takes the initial responsibility to cause a vision to become a success
 Entrepreneurs take prudent risks. They assess costs, market/customer needs and persuade
other to join and help
 An Entrepreneur is usually a positive thinker and a decision maker.
Contributions of Entrepreneurs
1. Develop new markets. Under the modern concept of marketing markets are people who
are willing and able to satisfy their needs. In Economics, this is called effective demand.
Entrepreneurs are resourceful and creative. They can create customers or buyers. This
makes Entrepreneurs different from ordinary businessmen who only perform traditional
functions of management like planning, organization and coordination.
2. Discover new sources of material. Entrepreneurs are never satisfied with traditional or
existing sources of materials. Due to their innovative nature, they persist on discovering
new sources of materials to improve their enterprises. In business, those who can develop
new sources of materials enjoy a comparative advantage in terms of supply, cost and
quality.
3. Mobilize capital resources. Entrepreneurs
are the organizers and coordinators of the
major factor of production, such as land labor
and capital. They properly mix these factors
or production to create goods and services.
Capital resources, from a layman's view,
refer to money. However, in economics,
capital resources represented machines,
buildings and other physical productive
resources. Entrepreneurs have initiative and
self-confidence in accumulating and
mobilizing capital resources for new
[Link]
businesses and business expansion.
4. Introduce new
and reasonable risk-taker, Entrepreneurs take
advantage of business opportunities and transform
these into profits. So they introduce something new
or something different. Such entrepreneurial spirit
has greatly contributed to the modernization of
economies. Every year, there are new technologies
and new products. All of these are intended to
satisfy human needs in more convenient and
[Link] pleasant way.

5. Create employment. The biggest employer is the private business sector. Millions of job
are provided by factories, service industries, agricultural enterprises, and the numerous
small scale businesses. For instance, the super department stores like SM, Unified,

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 Robinsons and others employ thousands of workers. Likewise giant corporations like
SMC, Ayala and Soriano group of companies are great job creators. Such massive
employment has multiplier and accelerator effects in the whole economy. More jobs
mean more incomes. This increase demand for goods and services. This stimulates
production. Again, more production requires more employment.

Advantage of Entrepreneurship
Every successful Entrepreneur brings out benefits not only for himself/herself but for the
municipality, region or country as whole. The benefits that can be derived from entrepreneurial
activities are as follows:
1. Enormous personal financial gain.
2. Self-employment, offering more job satisfaction and flexibility of the work force.
3. Employment for others, often better jobs.
4. Development of more industries, especially in rural areas or regions disadvantaged by
economic changes, for example due to globalization effects.
5. Encouragement of the processing of local materials into finished goods for domestic
consumption as well as for export.
6. Income generation and increased economic growth
7. Healthy competition this encourages higher quality products.
8. More goods and services available.
9. Development of new markets.
10. Promotion of the use of modern technology in small-scale manufacturing to enhance
higher productivity.
11. Encouragement of more researches/studies and development of modern machines and
equipment for domestic consumption.
12. Development of entrepreneurial qualities and attitudes among potential entrepreneurs to
bring about significant changes in the rural areas.
13. Freedom form the dependency on the job d offered by others.
14. The ability to have great accomplishment.
15. Reduction of the informal economy.
16. Emigration of talent may be stopped by a better domestic Entrepreneurship climate.

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