6B4

Winesha Smith

THE NATURE AND GROWTH OF ENTREPRENEURSHIP

EVOLUTION
Schumpeters theory
We are living in a complex and dynamic world in which innovation and
entrepreneurship are occupying a decisive role for economic development.
According to Joseph Alois Schumpeter carrying out innovations is the only
function which is fundamental in history. He also accented that It is
entrepreneurship that replaces todays Pareto optimum with tomorrows
different new thing. Schumpeter's words that entrepreneurship is innovation
have never seemed so appropriate as the nowadays, when modern capitalism
is experiencing a serious crisis and lost his strength during last subprime and
euro-debt crises. The purpose of this paper is the analysis of the Schumpeters
innovation concept in a context of first and second Entrepreneurship
theory.
Innovation, entrepreneurship, Schumpeters economy
Joseph Alois Schumpeter is regarded as one of the greatest economists of the first half of the twentieth
century. At that time, he took part in the most important economic debates. After his death, he had
been (more or less) forgotten for around three decades. In the early 1980s Schumpeterian economics
were considered extremely broad after a period when traditional economic approaches were
increasingly criticized. The concepts of innovation and entrepreneurship are probably Schumpeters
most distinctive contributions to economics. One of the most common themes in Schumpeters
writings was the role of innovation (new combinations) and entrepreneurship in economic growth.
Schumpeters first theory
Schumpeter in his early work presents the following entrepreneurship definition: The
function of entrepreneurs is to reform or revolutionize the pattern of production by exploiting
an invention or, more generally, an untried technological possibility for producing
a new commodity or producing an old one in a new way, by opening up a new source of
supply of materials or a new outlet for products, by reorganizing an industry and so on. The
entrepreneur is a pioneer who is able to act with confidence beyond the range of
familiar beacons. His characteristic task theoretically as well as historically consists
precisely in breaking up old, and creating new, tradition. As R.L. Allen rightly
pointed it would be better if Schumpeter, instead of using the concept of an entrepreneur
in his theory, used the concept of an innovator. It would shut down (lasting until today)
confusion associated with different semantic meaning of commonly used word. Anyway
Schumpeter's entrepreneur become a permanent part on the contemporary economic
theory.
However, the entrepreneur is the only one who indeed carries out new combinations.
Furthermore, person who has organized his company is immediately losing entrepreneur
function and begins to lead his company in accordance with a Schumpeters circular motion.
That is why there are no people who are lifelong entrepreneurs, and also there are
no businessman who even for a while was not an entrepreneur. According to Schumpeter,
it is not necessarily an entrepreneur who receives profit, but surely it is created entirely
thanks to him. Profit goes to the capitalist (the owner of the company), as well as the
rent goes to the hands of the owners of the land. Entrepreneur does not even have guarantee

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that it will remain entrepreneur in future. Everything depends only on his talent and
the will to act. Besides that, Schumpeter finds for entrepreneur three more motives to act,
there are:
the desire to create "own kingdom." Modern man, through his successes in industry or
trade, can get a sense of power and independence similar to the situation of the European
medieval lord;
the desire for gain. Entrepreneur can realize his wish to fight, to compete, to showing
his superiority over others, winning for the sake of winning. Comparing to the sport, in
economic life, there are "financial racing" but there is "financial boxing" too;
the joy of creation, to achieve something, or just exercise the energy and ingeniousness.
Schumpeters Second Entrepreneurship theory
In the late thirties, Schumpeter began to move away from his earlier theory of entrepreneurship,
then ultimately at the end of the thirties he presented new theory, which is completely different
The second theory is primarily a less individualistic. Schumpeter says explicitly, that entrepreneur
does not have to be one person (which is a radical departure from his earlier recognition
entrepreneur as an outstanding individualist). Schumpeter even states that the country itself, or its
agenda, can act as an entrepreneur. The evolution of Schumpeter's Entrepreneurship theory was
caused by his direct personal observation of American economic life.
In the new theory, Schumpeter does not make the entrepreneur right axis to all other
concepts. Relationship between the entrepreneur and banker was considered differently
too. Under the influence of the American experience, Schumpeter has abandon unilateral
inclusion formed on the basis of observations in Central Europe in the early twentieth
century. The idyllic vision of the banker as the most important authority of the capitalist
economy, the banker who was a representative of society authorized to provide financial
sanction to innovative activities of entrepreneur, is replaced by the realistic image of
modern impersonal prudent bank, embarrassing flexibility to innovator seeking to control
the enterprise.
Druckers Theory
Innovation and Entrepreneurship starts with Druckers drawing attention to a mystery: why, in the
American economy from 1965 to 1985, despite inflation and oil shocks, recessions and major job
losses in certain industries and government, there had been huge jobs growth. The jobs 40 million of
them - had not been created by large corporations or government, but mostly in small and medium
sized businesses. Most people explained the growth in one word: hi tech.
In fact, only 5 or 6 million of the new positions came from the technology field. The key technology
driving jobs growth, according to Drucker, was not widgets and gadgets, but
entrepreneurial management. The force of the entrepreneur, he suggests, is always greater than the
current state of the economy. Even the famous Kondratieff waves cycles of technology and
production that are meant to drive economies did not explain a lot of economic growth.
Management, or how things can be done better, is best appreciated as a social technology, as much
as a discipline like engineering or medicine. Drucker notes that the huge success of McDonalds was
in large part due to better management of a service that had previously been run by Mom and Pop
owners. Everything - the product, the time it took to make it, the way it was made, the way it was sold
and served - was refined and standardized beyond belief. This was not high tech, Drucker observes it was doing things in a different, better way, and in the process creating new value.

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What is an entrepreneur?
This was the original definition and the best, Drucker maintains.
Entrepreneurship is not a personality trait; it is a feature to be observed in the actions of people or
institutions. Entrepreneurs in health, education or business work basically the same way. Essentially,
they do not just do something better, but do it differently.
Classical economics says that economies tend towards equilibrium they optimize, which results in
incremental growth over time. But the nature of the entrepreneur is to upset and disorganize. He or
she is a wildcard that generates wealth through the process economist Joseph Schumpeter described
as creative destruction. This involves dealing with uncertainty and with the unknown, and having the
ability to exploit change or respond intelligently to changes. It is a misconception, Drucker says, to
think that everyone who starts a new business is being entrepreneurial. People do take a risk in
opening a shop or a franchise, but they are not really creating anything new, not creating a new type of
value for the customer in a way that, say, McDonalds did.
The risk myth
Drucker asks: why does entrepreneurship have the reputation of being very risky, when its purpose is
simply to shift resources from where they yield less, to where they yield more? In fact, it is less risky
than just doing the same thing better; in following this course it is easy to totally miss out on new
opportunities and run an enterprise into the shoals without hardly noticing. Embracing change and
assiduously trying out different things is actually the best way to invest resources. He points to the
amazingly successful record of constantly innovating hi-tech companies Bell Lab, IBM, 3M (today,
you would say Apple) - to see that this is true. Entrepreneurship is only risky, he observes, when socalled entrepreneurs violate elementary and well-known rules. It is not risky when it is 1)
systematic, 2) managed and 3) purposeful.
He notes:
Entrepreneurship is not natural; it is not creative. It is workEntrepreneurial businesses treat
entrepreneurship as a duty. They are disciplined about itthey work at itthey practice it.
Entrepreneurship can exist in large organizations, and in fact Drucker says they must become
entrepreneurial if they are to have long-term futures. General Electric in America, and the retailer
Marks and Spencer in the UK are both big companies which have strong records of creating new
value. The big expansion in American universities from the original elite college system was driven
by entrepreneurship: finding new customers for higher education by providing new worth and
relevance. This was not a case of taking great risks rather, identifying opportunities.