Entrepreneurship and small businesses

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  • Created on: 05-04-14 23:07


The evolution of entrepreneurship theory

Richard Cantillion – Successful entrepreneurs know how to deal with market uncertainty and take risks to make profit

British School – Macroeconomics, French School – Microeconomics

Decline in entrepreneurship was down to the rise of the theory of the firm.

According to Frank Knight, a market must be in a constant state of uncertainty, and entrepreneurship is the skilful interpretation of market changes.

Schumpeter focused on economic development and the role of the entrepreneur in the development process.

According to Schumpeter, the function of the entrepreneur is that of innovating or making 'new combinations' of production possible.

Creative destruction is when the free market destroys obsolete and useless markets.

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Entrepreneurial process

Entrepreneurship is the process of starting and running one’s own business through a ‘new combination’ of production.

Proactive search – You want to look for new opportunities

Reactive search – You have to look for new opportunities (i.e. – unemployment)

Fortuitous discovery – Stumbling on an unsought for opportunity

Prior knowledge within an industry may help entrepreneurs search for ideas.

Entrepreneurial process involves;

1) Discovery, 2) Concept development, 3) Resourcing, 4) Actualization, 5) Harvesting.

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Entrepreneurial creativity

Innovation is the ability to apply creative solutions to problems to enhance peoples lifes.

Creativity can lead to innovation

Innovation is rarely about invention

A paradigm is a preconceived idea of what the world should be like.

Right brain is linked to creativity and intuitiveness, can lead to innovation.

Barriers to creativity:

-          Paradigms

-          Focusing on being logical and not intuitive

-          Fear of failure

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Economics for entrepreneurs

Implicit costs do not require a cash outlay.

Explicit costs require an outlay of money.

Accounting test = Total explicit costs

Economic cost = Total implicit and explicit costs

A firm will enter the market if the price it charges covers its variable costs in the short run, and covers all its costs in the medium run.

Perfect competition – Price Taker, as firms have stiff competition

Monopoly – Price Maker, as firms have absolute power

Traditional theory of the firm – Short-run profit maximisation, make as much profit as possible.

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The social enterprise and social entrepreneur

A social enterprise is a business with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or in the community, rather than being driven by the need to maximise shareholder profits.

Social enterprises have a valuable role to play in helping create a strong, sustainable and socially inclusive economy.

Social enterprises differ from charities as they run like a business and engages in trading or service production.

Social enterprises differ from firms as there goal is not to maximise profits for the shareholders or owners.

Social enterprises emerge as a result of factory closures and scare employment opportunities.

However, social enterprises face the same risks and challenges as more traditional businesses.

Types of social enterprises - Employee-owned business, credit union, community business etc.

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Entrepreneurship and economic development

Baumol suggests that the entrepreneur is not needed in the neoclassical model of the firm.

Entrepreneurial policies are now seen as an essential way of encouraging economic growth, as it can stimulate competition, drive innovation and create employment.

Schumpeter suggests a link between innovation and economic development.

Demand and supply determines the number of entrepreneurs produced in a country.

Baumol - Policymaking promotes productive, unproductive and destructive activities.

Rent seeking -

This refers to when a company uses their resources to obtain an economic gain from others, without reciprocating any benefits back to society through wealth creation.

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The exit strategy

Many SMEs fail due to a lack of organisation, planning and leadership skills.

Life cycle of the firm - Start-up stage, Initial Growth, Rapid Growth, Continuous Growth

An exit strategy is designed to exit a firm with as little financial and person damage as possible.

Before creating an exit strategy, managers must consider - Motives, Identity, Sellers Remorse


This involves reaping the value of a business when they get out.

The process involves - Capturing value, Reducing risk, Creating future options.

Exit options without selling - Releasing cash flow, Liquidation, Succession

Exit options selling the firm - Selling the firm, Using private equity, Going public (IPO)

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Technical entrepreneurs

Technical entrepreneurs are individuals who operate within technologically advanced industries, focusing on their skills and expertise gained in a variety of different environments.

Schumpeter sees technical entrepreneurs as a combination of inventors and entrepreneurs.

Types of innovation:

Incremental innovations – Small improvements to existing product

Radical innovations – Technically superior products compared to existing ones

Discontinuous innovation – No equivalent product exists (i.e. - Cars)

Reengineered innovation – Potential to expand product range to become market leader

Disruptive innovation – Potential to displace established competitors (i.e. - Email)

Challenges faced; Access to credit, Trust in innovation, Passing on understanding to staff

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Habitual entrepreneurs

Novice entrepreneurs – No prior ownership experience

Habitual entrepreneurs – Holding or have held ownership stake in two or more firms

-       Serial entrepreneur – Have sold/closed at least one firm

-       Portfolio entrepreneur – Currently have stakes in 2 or more firms

Motivations for habitual entrepreneurship – Desire for independence, and income and wealth creation

Prior business ownership may allow habitual entrepreneurs to be more alert to opportunities.

Habitual entrepreneurs are said to be more cautious and realistic, as well as more creative.

Novice entrepreneurs with no entrepreneurial track record may find it difficult to access external funds and may rely on personal savings or family.

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Ethnicity & entrepreneurship

The business entry decision:

-       Economic opportunity model – Reliance on migrant businesses on local opportunities

-       Culture model – Some cultures are more predisposed to behave entrepreneurially

-       Reaction model – Ethic self-employment reaction against racism and cultural barriers

Family and co-ethnic labour can be a key competitive advantage for ethic minority businesses, since it is cheap. However, overreliance on family members can be problematic.

Underfunding remains a key problem for ethnic minority business, and the reasons for poor creditworthiness include..

-       Shorter financial relationships between banks and ethnic firms

-       Ethnic firms tend to have shorter business track records

-       Ethnic firms tend to have poorer financial records (i.e. – missed loan payments)

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Entrepreneurship & Small Businesses

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