4.1.

Innovation Theory by Schumpeter

According to him, innovation is the key factor in entrepreneurship

in addition to risk and organizing function. He defines,
Entrepreneurship as a “creative activity” and this creation may be in
the form of-

Introduction of new product with which customer is not familiar or

introduction of new quality of the existing product.

 Use of new method of production which is not yet tested

 Opening of new market in which particular manufacturer of the
country has not yet entered
 Conquest of new source of supplying raw material
 New form of organization

According to Schumpeter, Entrepreneurship is innovation and can be

in the form of any product, process, method, new market etc. It brings
new technological changes into the society. He also differentiated
between the innovator and inventor. Inventor is the one who invents
some new methods, technology, processes etc and Innovator is the
one who uses these new inventions to offer new products in the
market.

Schumpeter is the first major theorist to place the human at

the centre of the process of economic development. He is very clear
about the economic function of the entrepreneur. According to
him, entrepreneur is the major mover in economic development with
his function, to innovate or bring out new combinations. To
Schumpeter, entrepreneurs are persons who are motivated by a spirit
for power; their extraordinary characteristic being an innate capacity
to choose correct answers, energy, will and mind to conquer fixed
talents of thoughts, and a capacity to withstand social opposition. The
factors that contribute to the development of entrepreneurship would
essentially be a suitable environment in grasping the essential facts. It
can be noted that this theory’s main figure, the “innovating
entrepreneur” has played an important role in the rise of modern
capitalism. The entrepreneur has been the prime mover –
for economic development process.

Criticism:

 This theory seems to be one sided as it put extreme stress on

entrepreneurship only and ignores the other functions of the
entrepreneurship.
 Applicability and success of this theory becomes doubtful
in under developed country.

4.2. Theory of High Achievement by McClelland

This theory is regarded as the most important psychological theory.

McClelland wanted to find the internal factors that motivate people to
take opportunity of the trade.

According to McClelland, a person attains three types of needs as an

outcome of one‟s life knowledge.
Three needs are:

 Need for Achievement: A drive to excel, advance and grow.

 Need for Power: A drive to dominate or influence others and
situations.
 Need for Affiliation: A drive for friendly and close inter-
personal relationships.

According to the McClelland, people who have high need for

achievement have tendency to win and excel. People who have high
need for achievement personally take the responsibility of solving
problems and will always try to be better than others. He further
explained that people with high need of achievement are more likely
to succeed as entrepreneur because it is the need for achievement that
motivates and promotes entrepreneurship.
 The definite characteristics of a high achiever (entrepreneur) can be
listed as follows:
(i) They lay down moderate realistic and achievable goals for
them.
(ii) They take planned risks.
(iii) They favor situations wherein they can get individual
responsibility for solving problems.
(iv) They need actual feedback on how well they are doing.
(v) Their need for achievement live not only for the sake of
economic rewards or social recognition rather personal achievement is
essentially more satisfying to them.

4.3. Leibenstein’s X-Efficiency Theory

The thought of x-efficiency was introduced by Harvey Leibenstein

in his paper Allocative efficiency v. “x-efficiency” in American
Economic Review 1966. This theory was recently applied to
entrepreneurship and otherwise was developed for the firms in
determining the degree of inefficiencies. X-Efficiency is the degree of
inefficiency in the use of resources within the firm, it measures the
extent to which the firm fails to realise its productive potential. When
the input is not used efficiently then the difference between the actual
output and the maximum attainable output is the X-efficiency. X
efficiency occurs if resources are wasted or not used at all.

Therefore, leibenstein identifies two roles for the entrepreneur: gap

filler and an input completer. Thus, if not all the inputs will be used
there will be market imperfections and entrepreneur has to fill the
gaps to correct the market imperfections. The other role is of input
completer, to make available the inputs required for the efficient
outputs.
According to him there are two types of entrepreneurship.
(i) Routine entrepreneurship – deals with normal business
functions like co-ordinating the business activities.
(ii) Innovative entrepreneurship – wherein an entrepreneur is
innovative in his approach. It includes the activities necessary to
create an enterprise where not all the markets are well-established or
clearly defined.

4.4. Risk bearing theory of Knight:

According to Knight, the most important feature of entrepreneurship

is Risk bearing. Some important features of the theory are:

 Risk Creates profit: As entrepreneur bears risk, therefore he

earns profit.
 More Risk more Gain: Entrepreneurs face different types of
risks according to their ability and interests. This theory states
that more the risk more will be the returns.
 Profit as Reward and cost: Profit is the reward of bearing risk.
Therefore, it is also called as normal cost of production.
 Entrepreneur’s income is uncertain: According to knight,
uncertainty is the important element of entrepreneurship.
There are two types of the risk: insurable and non-insurable.
Entrepreneur earns profit because he bears non– insurable risk
which is uncertain.

4.5. Max Weber’s theory of entrepreneurial growth:

Max Weber believes that religion has a large impact on the

entrepreneurial development of the country because some religion has
basic faith to earn more money whereas some has less. He calls them
„spirit of capitalism‟ which can be enhanced in the country if there
will be favourable attitude towards capitalism in the country. It is the
religious beliefs that develop the sense of capitalism in the individual
which generates the feeling of occupational chase and the addition of
assets. This theory states that Hinduism, Buddhism and Islam do not
encourage entrepreneurship which was criticized by various
sociologists.

Max Weber’s Theory

 This theory was criticized by many researchers, as it was based on
the invalid assumptions like:
(a) There is a single system of Hindu value.
(b) The Indian people learn those values and translate them to
their every day behaviour, and
(c) These values remained resistant to and protected against
external pressures and change.
The quick growth of entrepreneurship in India since independence
shows that Hinduism is not averse to the spirit of capitalism and to
adventurous spirit but some researchers has accepted this theory but it
was not universally accepted.

4.6. Hagen’s theory of entrepreneurship

Hagen‟s has propounded a theory of withdrawal of status respect.

According to him, withdrawal of status respect leads to the
entrepreneurship. It occurs when the member in the group perceive
that their efforts and purposes in the life are not valued by the other
members. He proposed four events which can lead to status
withdrawal:

 Displacement of a conventional best group from its earlier status

by another conventional supply physical force.
 Defamation of valued symbols through some change in the
attitude of the superior group
 Inconsistency of status symbols with a changing‟ distribution of
economic power.
 Acceptance of expected status on migration to a new society.

He further stated that withdrawal of the status respect would give

rise to following:
(a) Innovator: An entrepreneur who is innovative and try to attain
his objectives set by himself
(b) Retreatist: Entrepreneur who keeps on working in society but
remains apathetic to his work or status.
(c) Ritualist: One who works as per the rules of the society but has
no hope in the improvement in his status.
 (d) Reformist: One who is a revolting and tries to carry new ways
of working and develops new society.

Hagen developed this theory from the case of samurai community

of Japan who were deprived of the high status they were enjoying and
thus gave rise to many entrepreneurs as they want to gain their lost
prestige.

4.7. Thomas Cochran’s Theory of Cultural Values

According to him, entrepreneurs are not super normal powers but

are the role models of the society. The key magnitude in this
theory is cultural values, role expectations and social
sanctions. Entrepreneur‟s performance is influenced by the three
factors:

 own attitudes towards his occupation,

 the role expectations held by sanctioning groups,
 and the operational requirements of the job.

Society‟s values are the main determinant of the first two factors and
the changes over the time in different variables like population;
technology etc will impose change in role expectations by generating
new operational needs.

4.8. Theory of Change in Group Level Pattern:

This theory of change is propounded by Young. He conducted a

Thematic Appreciation Test (TAT) on group of entrepreneurs. This
test revealed that entrepreneurs has the ability to define the solution to
the problem, awareness of the efforts required, confidence in their
own ability and ability to analyse the situation before decision
making. Young‟s theory is a theory of change based on society‟s
incorporation of reactive subgroups. A group becomes reactive when
the following three conditions coincide:

 When the group has better institutional resources than the other
groups of the society at the same level
  When the group experiences low status respect.
 When deprived of access to important social networks.

4.9. Economic theory of Entrepreneurship:

This theory was propounded by Papanek and Harris. According to

them if economic incentives are available in the country then there
will be entrepreneurship. Economists believe that entrepreneurship
and economic growth exists where economic conditions are
favourable to the business environment. There are large numbers of
economic factors which helps in upgrade or degrade entrepreneurship
in a country. Following are the factors:

(a) The availability of bank credit

(b) High capital formation with a good flow of savings and
investments
(c) Supply for loanable funds with a lower rate of interest.
(d) Increased demand for consumer goods and services
(e) Availability of productive resources.
(f) Efficient economic policies like fiscal and monetary policies
(g) Communication and transportation facilities

It is further strengthened by the fact that Marwaris and Vaishyas are

everywhere in the country but only Gujarati Marwaris and Vaishyas
leads in businesses because Gujarat has a more favourable economic
conditions. Thus, it is concluded that favourable business
environment has impact on entrepreneurial growth.

4.10. Exposure Theory of Entrepreneurship

This theory states that exposure to new ideas and opportunities leads
to innovation and creativity thus creates a new enterprise. An
Individual’s education, cultural values, motivation, economic factors,
need for achievement, religious beliefs and risk bearing capacity helps
in exposing him/her towards the new ideas and opportunities and thus
leading to innovation and creativity. Innovation is the most important
factor entrepreneurship.
 4.11. Political System Theory of Entrepreneurial Growth

This theory states that favourable political environment has an

impact on the entrepreneurial growth because stable political system
creates infrastructure, promotes policies and encourage people
towards entrepreneurship. Commitment in the political system creates
a favourable business environment and enhances creative and
entrepreneurial ability which leads to the entrepreneurial growth in
the country.