Chapter One

Entrepreneurship and Free Enterprise

Welcome to the world of the entrepreneur! Around the world, growing numbers of people are
realizing their dreams of owning and operating their own businesses. Globally, one in eight
adults is actively engaged in launching a business [CITATION Nor16 \l 1033 ]. Entrepreneurship is a
significant driver of improvements in social welfare and economic prosperity [CITATION Hnl16 \l
1033 ]. Entrepreneurship continues to thrive in nearly every corner of the world. This
entrepreneurial spirit is the most significant economic development in recent business
history[CITATION Nor16 \l 1033 ]. Entrepreneurship is the essence of free enterprise because the
birth of new businesses gives a market economy its vitality. New and emerging businesses
create a very large proportion of the innovative products and services that transform the way
we work and live[CITATION Wil11 \l 1033 ]. Above all, entrepreneurship today is the product of
teamwork and the ability to create, build and work as a team.
1.1 Meaning of an entrepreneur and Entrepreneurship
What is an entrepreneurship?
Entrepreneurship is the process of identifying opportunities for which marketable needs exist
and assuming the risk of creating an organization to satisfy them [ CITATION Tim09 \l 1033 ].
Entrepreneurship refers to a process of action an entrepreneur undertakes to establish his or
her enterprise. Entrepreneurship is a composite skill, the resultant of a mix of many qualities
and traits. These include imagination, readiness to take risks, ability to bring together and put
to use other factors of production, capital, labor, and land as also intangible factors such as the
ability to mobilize scientific and technological advances.
 According Robert Ronsadt( nd) to entrepreneurship is the dynamic process of creating
incremental wealth. This wealth is created by individuals who assume the major risks in
terms of equity, time and or career commitments of providing value for some products or
services. The product or services by may or may not be new or unique, but value must
somehow be infused by the entrepreneur by securing and allocating the necessary skills and
resources[CITATION Hnl16 \l 1033 ].
 Entrepreneurship is indeed the process of creating and building something of from
practically nothing. It involves the definition, creation, and distribution of value and benefits
to individuals, groups, organizations and society at large.
What is an entrepreneur?
 The term entrepreneur comes from the French word entreprendre, which means “to
undertake” that is dated from the seventeenth century, translates literally as “between-
taker” or “go-between.” It originally referred to men who organized and managed
exploration expeditions and military maneuvers.
 The term ‘entrepreneur’ appears to have been introduced into economic theory by Richard
Cantillon (1755), an Irish economist of French descent. According to Cantillon, the
entrepreneur is a specialist in taking on risk[ CITATION Mar10 \l 1033 ]
 An entrepreneur is a person who relentlessly pursues an opportunity, in either a new or an
existing enterprise, to create value while assuming both the risk and the reward for her or
his efforts[ CITATION Jus17 \l 1033 ]

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 An entrepreneur is a person who creates a business or product, manages his/her resources
and takes risks to gain a profit.
 Jean Baptiste (1816) described the entrepreneur as the agent who unites all means of
production and “who finds in the value of the products-the reestablishment of the entire
capital, he employs, and the value of the wages, the interest, and rent which he pays as well
as profits belonging to himself.”
 According to Frank Knight (1921), the entrepreneur attempts to foresee and act upon
changes within markets. Knights emphasized the entrepreneur’s role in bearing the
uncertainty of market dynamics.
 An entrepreneur is a person who sees an opportunity or has an idea and assumes the risk of
starting a business to take advantage of that opportunity or idea [ CITATION Tim09 \l 1033 ] .
The risks that go with creating an organization can be financial, material, and psychological.
 Peter Drucker describes an entrepreneur as “someone who always searches for change,
responds to it, and exploits it as an opportunity.”
 Entrepreneurs do. In his 1911 book The Theory of Economic Development, economist
Joseph Schumpeter wrote that entrepreneurs are more than just business creators; they are
change agents in society. The process of creative destruction, in which entrepreneurs create
new ideas and new businesses that make existing ones obsolete, is a sign of a vibrant
economy cited in [ CITATION Nor16 \l 1033 ]
Adam Smith (1776) also stressed that an entrepreneur is an individual who undertook the
formation of an organization for commercial purpose. He also said that an entrepreneur is a
person with unusual foresight who could recognize the potential demand for goods and
services and so transform demand into supply. Entrepreneurs are those who create and/or
expand business through an innovative combination of resources. Distinguishing factors are
that entrepreneurs have a vision for growth, commitment for constructive change, persistence
to gather necessary resources, and energy to achieve unusual results. An Entrepreneur is a
combination of the thinker and doer. He/she generates new ideas and turns them into business
ventures.
Entrepreneur and Entrepreneurship
 The term ‘entrepreneur’ is often used interchangeably with ‘entrepreneurship’ but
conceptually; they are different just like the two sides of a coin. The differences are as follows:
 Entrepreneur Entrepreneurship  Entrepreneur Entrepreneurship
 Refers to a person Refers to a process  Leader Leadership
 Able to visualize Vision  Motivator Motivation
 Creator Creation  Programmer Action
 Organizer Organization  Risk Taker Risk Taking
 Innovator Innovation.  Communicator Communication
 Decision Maker Decision  Administrator Administration
 Leader Leadership
 This simple formula states that entrepreneurship is a function of the entrepreneur.
Entrepreneurship = f (entrepreneur)[CITATION Hnl16 \l 1033 ].

Entreperueur Enterepreneurship Enterprise

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Person Process Outcome
Manager and Entrepreneur
There are a number of similarities and ambiguities between manager and entrepreneur; and of
course, in most small-scale businesses both refer to the same person. However, each of the two
concepts is distinct from the other. The major differences between manager and entrepreneur
are shown in the following table.
Manager Entrepreneur
 The manager is not necessarily the full risk  The entrepreneur is the full risk taker. He or she is
taker of the business; he or she might be the creator of the business.
hired personnel like any of the other  Entrepreneurs' activity seeks change by exploiting
employees. opportunities.
 They tend to delegate tasks and supervise  They look at their business growth over a long
those workers performing the task. period of time.
 Managers tend to be custodial; prefer to  Entrepreneurs put their own personal finance at
stick to prove ways of doing business. risk and they accept risk as part of the
 Managers are more oriented to the entrepreneurial process.
achievement of short-term goals.  They are directly involved in their organization's
 They are rewarded by minimizing risk and operational activities.
avoiding failure.
Investor and Entrepreneurs
"Entrepreneur" and "investor" are overlapping but not identical terms. Generally all
entrepreneurs are investors while not all investors are entrepreneurs for the following major
reasons.
Investors Entrepreneurs
 They are people who invest their money  They are people who invest not only their money
on a business (businesses) but also their idea, time, physical & mental
 They are profit and/or other forms of energy, and, of course, their own life on
utility maximizes. business.
 They do not necessarily maintain strong  They are opportunity maximizes, spiritual
physical and/or spiritual attachment satisfaction hunters.
with their business.  They maintain very strong physical and spiritual
 An investor may simply be a company, attachment with their business and the
shareholder, who knows very little company.
about the business and/or the  Often, they are the owners and the managers of
company. their firms. They closely follow (often lead) the
 They are not necessarily risk-takers. day-to-day activities of the firm.
Keeping money in banks or purchasing  They are necessarily risk-takers. Getting financial
government bonds with the aim of benefits without being actively involved in the
earning interest, for example, makes creation of wealth will not make one an
one or investor (a financial investors) entrepreneur.
 They are not necessarily job-creators  They are necessarily job-creators. At the

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(consider the above examples on minimum, an entrepreneur creates a job for
financial investment) himself or herself.
 They may duplicate or copy things done  They are innovators. Duplicating or copying
by others. Establishing the most without any change will not make one an
common type of business, say opening entrepreneur. Each entrepreneur is distinct, one
a kiosk, will a make one an investor. way or another.
 They are an organization, a group of  "Entrepreneur" refers to individuals, not to
organizations, and even the state can be organizations, groups of organizations or the state.
(and often are) investor. Existence of corporate entrepreneurship often
referred to, as "Entrepreneurship" is debatable; and
if it exists, it must be substantially different type of
ER.
1.1.1 Historical Perspective of Entrepreneurship and entrepreneur.
During the early period an ‘entrepreneur ‘was a merchant adventurer who signs a contract with
a money person (a form of venture capitalist) to sell his goods. During that time, a common
contract provided a loan to the merchant-adventurer at a 22.5% rate. The merchant-
adventurer traveled great distances to a market for the goods and played the active role in
selling the goods bearing all the physical and emotional risks. Finally –profits were divided with
the capitalist in 1 to3 ratio, the capitalists taking up to75%.
During this time the term entrepreneur was given to both an actor and a person who run large
production projects. This individual did not take any risk but simply administered the project
using the resources provided by the government of the country. Also in the early 1600s, the
French men who organized and led military expeditions were called “entrepreneurs.” In 17 th
century the person entrepreneur entered into a contract with the government to perform a
service or to supply specific products at a fixed contract price bearing the risk of loss in the case
of price escalations
In the 18th Century the first theory of entrepreneur has been developed by Richard Cantillon. He
said that an entrepreneur is a risk taker. The entrepreneurs bear uncertainty. The view of an
entrepreneur as a risk taker was developing. Richard Cantillon defined entrepreneurship as self-
employment of any sort. Entrepreneurs buy goods at certain prices in the present and sell at
uncertain prices in the future.. In the 18 th century, the industrialization taking place all over the
world led to the clear separation of the entrepreneur from the capital provider.
In the late 19th and early 20 th Century an entrepreneur was viewed from economic
perspectives. The entrepreneur organizes and operates an enterprise for personal gain. In the
middle of the 20th Century the notion of an entrepreneur as an inventor as established. “The
function of the entrepreneur is to reform or revolutionize the pattern of production by
exploiting an invention or more generally untried technological possibility for producing new
commodities or producing an old one in a new way or opening a new outlet for products by
reorganizing a new industry.”
The concept of innovation and newness are at the heart of the above definition. From the
historical development it is possible to understand the fact that the perception of the word
entrepreneur was evolved from managing commercial project to the application of innovation
(creativity) in the business idea.
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1.1.2 Entrepreneurial Competencies
Competencies refer to underlying characteristics of a person which results in effective or
superior performance in a job. People often ask, “Are entrepreneurs born or made?” That
question has long been debated with little agreement. However, Stephen Spinelli and Robert
Adams have nicely summarized research on entrepreneurial characteristics. According to
Longenecker, (2017) and Cornwall,(2016) the entrepreneurs they describe as having and
exhibiting “desirable and acquirable attitudes and behaviors” fall under the following
descriptors.
1. Persistence or Determination —Tenacious, decisive, and persistent in problem solving. They
take repeated action to overcome obstacles. Thomas Edison is famous for saying that genius
is “1% inspiration and 99% perspiration”/ sweat or activity/.

2. Leadership abilities—Self-starters and team builders who focus on honesty in their business
relationships.

3. Opportunity obsession or seeking— looks forward and take action on opportunities

(business, educational or personal growth) seizes unusual opportunities to obtain financing
equipment, land, workspace or assistance. They are aware of market and customer needs.
An opportunity is a favorable set of circumstances that creates a need for a new product,
service or business. It in

4. Tolerance of risk, ambiguity, and uncertainty—Risk takers, risk minimizers, and uncertainty
tolerators.

5. Creativity, self-reliance, and adaptability—Open-minded, flexible, uncomfortable with the

status quo, and quick to learn.

6. Motivation to excel—Goal-oriented and aware of personal strengths and weaknesses.

7. Initiative – taking action beyond job requirements or the demand of the situation. Doing
things before being asked or forced by the events. Acts to extend the business into new
areas, product or service.

8. Information seeking- Successful entrepreneurs do not rely on guesswork and do not rely on
others for information. Instead, they spend time collecting information about their
customers, competitors, suppliers, relevant technology and markets.
 Does personal research on how to provide a product or service.
 Consults experts for business or technical advice.
 Seeks information or asks question to clarify what is wanted or needed.
 Use information network to obtain useful information.
9. Concern for high quality of work- means doing things that meet or beat existing standards
of excellence.

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10. Efficiency oriented- finds ways to do things faster with fewer resources or at lower sources
or at a lower cost.
11. Systematic planning- plans by breaking a large task down in to subtasks. Develops plans that
anticipate obstacles. Evaluate alternatives. Take a logical and systematic approach to
activities.
12. Problem solving- generates new ideas or innovations sometimes. Switches to an alternative
strategy to reach a goal.

13. Flexibility is the ability to move quickly in response to changing market needs.
14. Self-confidence- has a strong belief in self and own abilities. Does something that he says
risky. Sticks with own ability to complete a task or meet a challenge.
15. Assertiveness – confronts the problems and issues with others directly tell others what they
have to do and disciplines those failing to perform as expected.
16. Persuasion – is a way of convincing someone to get something or make a decision in your
favor.
 Convince someone to buy a product or service.
 Convince someone to provide financing.
 Convinces someone to do something else that he would like that person to do.

17. Networking is an extended group of people with similar interests or concerns who interact
and remain in informal contact for mutual assistance or support. In a business environment
where we are in, we network with customers, suppliers, competitors, various firms,
different organizations, government offices and family,
18. Concern for employee welfare: Take positive action in response to employees’ personal
concern and improving the welfare of the employees.
All the above competencies are instrumental to make a person successful entrepreneur.
Entrepreneurial Skills
A skill is simply knowledge which is demonstrated by action. It is an ability to perform in a
certain way. An entrepreneur is someone who has a good business idea and can turn that idea
into reality. Turning an idea into reality calls upon two sorts of skills, these are:
 General management skills: These are skills required to organize the physical and financial
resources needed to run the venture.
 People management skills: Businesses are made by people. A business can only be
successful if the peoples who make it up are properly directed and are committed to make
an effort on its behalf.
1.1.3 Types of entrepreneurs
There are various ways by which entrepreneurs have been classified:-
1. Based on the type of business
A. Business entrepreneurs: These are individuals who conceive an idea for a new product
or service and then create a business to materialize their idea into reality. They tap both
production and marketing resources in their search to develop a new business
opportunity. They may set up a big establishment or a small business unit. They are

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called small business entrepreneurs when found in small business units such as
advertising readymade garments, etc.
B. Trade entrepreneur is one who undertakes trading activities but not concerned with the
manufacturing work.
C. Industrial entrepreneur is essentially a manufacturer who identifies the potential needs
of customers and tailors a product/service to meet the marketing need.
D. Corporate entrepreneur is an individual who plans develop and manages a corporate
body. Corporate is a separate legal entity.
E. Agricultural entrepreneurs are those entrepreneurs who undertake agricultural activities
as raising and marketing of crops, fertilizers and other inputs of agriculture.
2. Based on motivation: Motivation is the force that influences the effort of the entrepreneur
to achieve his/her objective. Based on motivation entrepreneur can be classified as:
A. Pure entrepreneur: an individual who is motivated by psychological and economic
rewards.
B. Induced entrepreneur: is one who is induced to take up an entrepreneurial task due to
the policy measures of the government that provides assistance, incentives and
necessary overhead facilities to start a venture.
C. Motivated entrepreneurs: they come in to being because of the possibility of making
and marketing some new product/service for the use of the customers.
D. Spontaneous entrepreneur: entrepreneurs start their business out of their natural
talents.
3. Entrepreneurial role
A. Founders’ /pure/ entrepreneurs: These are those who initiate business on the basis of
new or improved products/services. They are individuals who bring new firms in to
existence by surveying the market, raising funds etc.
B. General Managers: As new firms become well established, founders become less of
innovators and more administrators. General Managers involves the operation of
successful business firms. They manage the week to week and month to month
production, marketing and financial function of enterprise. The distinction between
founders and General Managers is often hazy.
C. Franchises: Franchises differ from general managers in the degree of their
independence. Because of the constraints and guidance provided by contractual
relations with franchising organizations, franchisees function as limited entrepreneurs.
4. Types of Entrepreneurial venture
A. Marginal Firms: It is a small firm which provides insignificant profit to its owners. It
provides a profit return that does little more than compensating them for the time.
Some examples are very small dry cleaners, beauty shops, repair shops and others.
B. Attractive small companies: They offer a substantial reward to their owner. These are
strong segment of small business. ‘The good’ firms which can provide rewarding carriers
even to well-educated young people.
C. High potential ventures: These are firms that have great prospect for growth.
Frequently these are also high-technology ventures. At the time of the firms founding

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the owners often anticipate rapid growth, a possible merger or going public within a few
years.
5. Types of entrepreneurial styles: Because of varied backgrounds, entrepreneurs display
great variations in their styles of doing business.
A. Craftsman entrepreneur: This is a person who starts business with primarily technical skills
and little business knowledge and lack good communication skill. Characteristics of such
entrepreneurs are:
 They are paternalistic
 They are reluctant to delegate authority
 Use few 1 or 2 capital sources.
 They define marketing strategy in terms of the traditional price quantity company
reputation.
 Their sales efforts are primarily personal.
B. Opportunistic entrepreneur: This refers to person who has supplemented technical
education by studying such non-technical subjects as economics, English, law etc,
characteristics.
1.2 Motivation for starting a business
Some of the reasons for the difficulties in classifying those involved in small business
management are the wide variety of motives for their involvement in small firms. The reason
for small business/firm formation can be divided in to “pull” and “push” influences.
1. Pull factors: Some individuals are attracted towards small business ownership by positive
motives such as a specific idea which they are convinced with work “pull” motives include:
 Desire for independence
 Desire to extract the opportunity
 Turning a hobby by previous work experience into a business
 Financial incentives
2. Push factors: Many people are pushed into finding a new enterprise by a variety factors
including:
 Redundancy- when other employment opportunities are low
 Unemployment
 Disagreement with previous employer
 Barriers to entrepreneurship
 Environmental barriers: This includes raw material, labor, machinery, land and building
 Financial barrier
 Personal barrier: This includes lack of confidence, lack of motivation, lack of patience
and sense of pride.
 Societal barrier
1.3 Role of Entrepreneurship in Economic Development
Entrepreneurship plays a vital role in economic development. The economic development
largely depends on human recourses. Serve as the catalysts in the process of industrialization
and economic growth. Rate of economic growth (progress) of nation depends upon its rate of
innovation –depends upon the distribution of entrepreneurial talent in the population ………

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Joseph Schumpeter. Technical progress alone cannot lead to economic development, unless
technological breakthrough is put to economic use by entrepreneurs-who organizes and put to
use capital, labor and technology. The entrepreneur is the key to the creation of new
enterprises that energize the economy and rejuvenate the established enterprises that make up
the economic structure. Entrepreneurs initiate and sustain the process of economic
development in the following ways:
1. Capital formation: Entrepreneurs mobilize the idle savings of the public through the issue of
industrial securities. Investment of public saving in industry results in productive utilization of
nation’s resources. The rate of capital formation increases which is essential for rapid economic
growth. Thus, an entrepreneur is the creator of the wealth.
2. Improvement in per capita income: Entrepreneurs locate and exploit opportunities. They
convert the talent and idle resources like land, labor, and capital into national income and
wealth in the form of goods and services. They help to increase Net National Product and per
capita income in the country, which are important yardsticks for measuring economic growth.
3. Generation of employment: Entrepreneurs generates employment both directly and indirectly.
Directly, self-employment as an entrepreneur offers the way for independent and honorably
life. Indirectly, by setting up large and small- scale business units they offer jobs to millions.
Thus, entrepreneurship helps to reduce the unemployment problem in the country.
4. Balanced regional development: Entrepreneurs in the public and private sectors help to
regional disparities in economic development. They set up industries in backward areas to avail
of the various concessions and subsidies offered by the central and state governments.
5. Improving in living standards: Production of goods on a mass scale and manufacture of
handcrafts, etc in the scale sector help to improve the standard of life of a common man. These
offer goods or lower costs and increase in consumption.
6. Economic independence: Entrepreneurship is essential for national self-reliance. Business men
export goods and services on a large scale and thereby earn the scarce foreign exchange for the
country.
7. Agent’s role: Entrepreneurs are aptly called ‘agents of change’ Entrepreneurs act as catalyst or
agent of economic development by perceiving opportunities and putting them into action.
Entrepreneurs, seizing opportunities, set-up business undertakings and industries and thereby
make economic transformation. Thus economic development is an effect for which
entrepreneurship is the cause.
8. Role of innovation: Innovation is a key to entrepreneurship. Innovation implies the commercial
application of an invention. Entrepreneurs have contributed many innovations in developing
new products and in the existing products and services.
9. Imitating role: Entrepreneurs in developing countries take the role of “Imitators “who
generally copy the innovations introduced by the “innovative “entrepreneurs of the developed
countries. Imitative entrepreneurship seems to be the best medicine for underdeveloped
countries to overcome their entrepreneurial ills and bring about substantial economic
development. Entrepreneurship has the potential of transforming underdeveloped economies
to developed economies.
1.4 Innovation, creativity, and entrepreneurship
Creativity
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Creativity is the ability to develop new ideas and to discover new ways of looking at problems
and opportunities[CITATION Nor16 \l 1033 ]. Creativity is the ability to bring something new into
existence. Entrepreneurs bring new ideas for setting up/running new business ventures. An
entrepreneur who is creative and brings her/his ideas into reality turns to be successful in
business.
Innovation
Innovation is the successor of creativity. Innovation is the ability to apply creative solutions to
those problems and opportunities to enhance or enrich people’s lives [CITATION Nor16 \l 1033 ].
Innovation can be defined as the successful exploitation of new ideas –incorporating new
technology, design, and best practice-the key business process that enables business to
compete effectively. Innovation is the process of doing new things. It is more than just a good
idea. Ideas have little value unless they are converted into a useful products or services.
Innovation is a tool which the small scale- industry can exploit. Harvard’s Ted Levitt says
creativity is thinking new things and innovation is doing new things [CITATION Nor16 \l 1033 ]. In
short, entrepreneurs succeed by thinking and doing new things or old things in new ways.
Simply having a great new idea is not enough; transforming the idea into a tangible product,
service, or business venture is the essential next step. Some small businesses create innovations
reactively in response to customer feedback or changing market conditions, and others create
innovations proactively, spotting opportunities on which to capitalize. Sometimes innovation is
revolutionary, creating market-changing, disruptive breakthroughs that are the result of
generating something from nothing. More often, innovation is evolutionary, developing market-
sustaining ideas that elaborate on existing products, processes, and services that result from
putting old things together in new ways or from taking something away to create something
simpler or better[CITATION Nor16 \l 1033 ].
Creativity, Innovation and Entrepreneurship: The linkage.

Creativity innovation Entrepreneurship

Innovation is different from invention. An invention is the discovery of new methods and new
materials, whereas innovation is the utilization of inventions to produce a new better quality of
products that give greater satisfaction to the consumer and higher profits to the entrepreneur.
Are creative persons born or made? Creativity is a function of the brains right hemisphere and
creative persons are born, not made……….some psychologists. But various scientific researchers
have proved that the human can be conditioned under a stimulating environment to become
creative.

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