Introduction To Entrepreneurship - Ver2r

Entrepreneurship courses in Tbilisi State University Part A
INTRODUCTION TO ENTREPRENEURSHIP
PART A: THEORISING ENTREPRENEURSHIP
The Background of the Entrepreneurial Activity
Joseph Hassid Alexios-Stefanos Komselis
May 2007
University of Piraeus May 2007
Table of Contents
Table of Contents.............................................................................................1 Foreword..........................................................................................................3 Introduction to Entrepreneurship Theorising Entrepreneurship ....................4 1. Approaches to Entrepreneurship..............................................................5 1.1 Economics ..........................................................................................6 1.1.1 Arbitrage and uncertainty .............................................................6 1.1.2 Co-ordination of the production factors ........................................8 1.1.3 Innovation.....................................................................................8 1.1.4 Skill Differentiation........................................................................9 1.1.5 Career Mobility ...........................................................................10 1.1.6 A Final View of Economic Theories............................................11 1.2 Psychology .......................................................................................12 1.2.1 The need for achievement..........................................................12 1.2.2 Internal Locus of Control ............................................................13 1.2.3 Risk Taking Propensity...............................................................14 1.2.4 Tolerance of Ambiguity...............................................................14 1.2.5 Type A Behaviour ....................................................................14 1.2.6 Criminal Propensity ....................................................................14 1.2.7 Independence and Job Satisfaction ...........................................15 1.2.8 Over-Optimism ...........................................................................15 1.2.9 Criticism of the Psychological Traits Approach ..........................17 1.3 Personal, Family and Social Issues ..................................................18 1.3.1 Marriage .....................................................................................18 1.3.2 Health and Disability...................................................................19 1.3.3 Age, Education and Experience .................................................19 1.3.4 Family.........................................................................................21 1.3.5 Unemployment ...........................................................................22 1.3.6 Regionality .................................................................................23 1.3.7 Immigration and Ethnic Minority .................................................23 1.3.8 Female Entrepreneurship...........................................................25 1.4 Macroeconomic Factors....................................................................28 1.4.1 Economic Development .............................................................28 1.4.2 Industrial Structure .....................................................................28
1.4.3 Government Policy .....................................................................29 1.5 A Final Look at the Entrepreneur ......................................................31 2. Introduction to the Entrepreneurial Process ...........................................39 2.1 The Drive behind Entrepreneurial Change........................................39 2.2 The Entrepreneurial Process ............................................................40 2.3 The Entrepreneurial Mindset.............................................................42 3. Entrepreneurship of need vs. of opportunity ......................................45 4. Serial Entrepreneurship..........................................................................48 5. Entrepreneurial Networks .......................................................................51 6. Intrapreneurship and Innovation.............................................................56 7. Small and Medium Enterprises...............................................................60 7.1 Definition...........................................................................................60 7.2 SME Importance and Survival ..........................................................63 7.3 The Difference between Entrepreneurship and SME Management..65 8. Future Challenges for Entrepreneurship Research ................................70 Part A Bibliography and Further Reading ......................................................73
Foreword
There are good arguments to support the rapid increase in entrepreneurship education. By stimulating young minds to embrace enterprise values a dynamic and challenging mindset is encouraged. It is believed that enterprise education will greatly contribute to increasing learners; motivation and to making the school system more attractive, relevant and effective.
The above arguments are clearly sufficient to justify the introduction of Entrepreneurship courses in higher education institutions and even to lower levels of the educational systems especially in countries where the economic system is undergoing changes and is directed towards market economy operation.
The University of Piraeus has a long tradition and expertise in designing such courses and in delivering entrepreneurship related educational material.
With the generous support of the Government of Greece (Ministry of Foreign Affairs Hellenic Aid programme) and the cooperation of the State University of Tbilisi in Georgia, it became possible for a Course in Entrepreneurship to be introduced.
The manual in hand constitutes part of the educational material to be delivered. It is planned that this will be supplemented with other materials which will stimulate students class work, facilitate interaction and promote better comprehension of both theoretical issues and practical dimensions of entrepreneurship.
It is hoped that, with the cooperation of local TSU partners, the support of the Universitys Administration and the active contribution of the students themselves, the course will achieve its objectives and secure its sustainability.
Professor Joseph Hassid Project Coordinator
Introduction to Entrepreneurship Theorising Entrepreneurship

In this initial Part A of the Introduction to Entrepreneurship, we will go through the main concepts and ideas that have been formulated by academics and researchers. Initial and seminal input from the previous centuries, and contemporary theory will provide the background to the practical application of entrepreneurship within the modern economies and markets. So, theories from the fields of economics and psychology, and several other factors that have been related to entrepreneurship are presented below. The scope is to gain an overall understanding of the entrepreneurial process and better understand the modern theory and practice.
However,
before
we
go
into
the
theories
and
issues
regarding
entrepreneurship, we need to offer a definition of the term. The word entrepreneur is of French origin and literally means the person that takes between the middleman; in a more free translation, the individual who pursues a commercial activity. As Bruyat and Julien (2001) point out, defining entrepreneurship is still a major dispute among researchers and the word entrepreneur still has no common meaning among the academic community. There are several approaches to this issue, which come from different view points and have their roots within the theory that each scholar adopts as the basis for his or her research. The explanation and presentation of the various streams that dominate the definition debate is not within the spectrum of this work. Anyone interested in studying the lively dialogue on this issue can refer to some of the many papers that deal with it. So, we will adopt a very broad definition for entrepreneurship that incorporates business owners and self employed individuals. Also, as explained further below, individuals that exhibit entrepreneurial behaviour while being employed (what is called intrapreneurship) are included in our definition. Finally, the only distinction that holds in this work is the distinction between Small and Medium Business Management and Entrepreneurship. The latter, includes the notion of growth and business development, while the former only describes how to run a business.
1. Approaches to Entrepreneurship
Learning Objectives: After having read chapter 1.1 you should be able to: Understand the key economic theories that have been developed over the years in relation to entrepreneurship. Understand the psychological traits approach to the individual entrepreneur. Understand the main issues related to personal, family and social status in relation to entrepreneurship. Understand other macroeconomic factors that influence entrepreneurship. Differentiate between the theoretical approaches to entrepreneurship and critically assess their contribution to the field.
Theories that are dealing with entrepreneurship come mainly from three different disciplines of research: economics, psychology and sociology. Economists look into the effect of entrepreneurship on and the role of the entrepreneur in economic development, as well as application of economic and growth theories within the entrepreneurial context. Psychologists have been interested in identifying the personal characteristics and traits of entrepreneurs. Sociologists have been looking into behavioural aspects of the entrepreneurial personality and its interaction with other social constructs. All of these approaches to entrepreneurship help us understand the way it works and how entrepreneurs behave. However, theories on entrepreneurship that come form psychology and sociology are sometimes questionable and controversial, and the reader must therefore use them to understand rather than define the entrepreneur. Finally, nowadays, research on
entrepreneurship has been established as a distinctive field for scholars to search, formulate and propose new theories.
The focus on entrepreneurship is attributed to the importance of Small and Medium Enterprises (SMEs) for national economic growth and labour creation. In order to have growth within the SME sector, entrepreneurs are needed to run businesses and demonstrate their capabilities. SMEs have
become important to national economies lately since the middle of the 20th century and thus research in this area is still young and ongoing. This fact also explains why research on entrepreneurship has been left out by many of the mainstream classical economic thinkers and only economists considered outsiders in their times looked into it. And this brings us to the first evidence of the entrepreneur in economic thinking.
1.1 Economics Economic thinking in respect to entrepreneurship can be divided into two eras. The early views of entrepreneurship include thinkers such as Cantillon, Say, Schumpeter etc. Modern views include Kanbur, Lucas etc. Early theories on entrepreneurship are more of concepts delivered by economic thinkers, while modern theories are presented by economists on a more technocratic and scientific manner. Early economists, who introduced the term entrepreneur in economic theory, mainly focused on four different projectiles. Below you can find the main economists behind each approach, not in chronological order, but categorised per approach. Modern economic theories on entrepreneurship come from the neo-classical microeconomics and they primarily try to look into the optimisation of the choice between entrepreneurship and employment. They differ from early views in mainly two ways. Firstly, they adopt Knights (1921) proposition that people become entrepreneurs by choice. A choice that is based on the utility maximising paradigm, meaning that people choose to be entrepreneurs over paid employment when the expected return is greater. Secondly, modern economic theories often assume that perfect competition exists in markets, technology is given and all supplying market participants are price takers. This is mainly done for reasons of simplicity. Further below the reader can find the key contemporary approaches to entrepreneurship. 1.1.1 Arbitrage and uncertainty The first one to introduce the word entrepreneur and highlight its importance for economic growth was the French scholar Richard Cantillon (1755). Cantillon proposed that entrepreneurs act as middlemen, buying at one point and selling at another. They became important for the economic development as private property rights became available to more people. Within this
process, entrepreneurs perform all exchanges and bear the risk of buying at certain prices and selling at uncertain ones. Hence, a Cantillons entrepreneur is anyone who has uncertain income. So, successful entrepreneurs are important to the economy, since they alleviate economic paralysis caused by uncertainty and risk. His approach implies that same doctrine behind Darwins evolution theory; only the fittest will survive. Unsuccessful entrepreneurs are therefore going to fail and the risk taken will force them out of business. The key role of Cantillons entrepreneur is not that of an innovator, but rather that of a profit seeking person. Perception, intelligence and risk taking help him bring together the two ends of a market. So, entrepreneurs will enter a market if profits persist and the amount of income is relative to the risk embedded in the specific markets transactions.
Kirzner (1973, 1985) developed Cantillons thoughts looking into the middleman role of the entrepreneur. In his view, the entrepreneur sees and exploits an opportunity that is there for everyone to see. Therefore, successful entrepreneurs have an increased level of alertness and manage to notice what other market players oversee. Kirzners entrepreneur gains on imperfect knowledge, meaning that he has some additional knowledge that differentiates him form others. This knowledge comes from costless information, the mere identification of something that has always been there.
Knight (1921) focused on Cantillons entrepreneur in respect to uncertainty. Entrepreneurial uncertainty stems from unknown availability of natural resources, technological change and price changes. Profits are uncertain, although input prices are given. Therefore entrepreneurs need to be selfconfident, judgemental, venturesome, posses the ability to foresee and lucky. Knight suggested that the choice of becoming an entrepreneur rather than a worker is dependent on the rewards relative to the uncertainty in each sector. So, entrepreneurs are not born but are opportunistic individuals that either turn to become entrepreneurs or paid employees, depending on the profit making possibilities of market relative to the inherent risk.
1.1.2 Co-ordination of the production factors The second approach towards understanding the entrepreneur was initiated by Jean-Baptiste Say (1828). Say proposed that central to the entrepreneurs role in the economy is the combination and co-ordination of the factors of production. He or she sits at the middle of the economic system and its market, directing and rewarding the various factors of production, and receives the difference between sales and cost as his profit. The factors of production are materials, people, information and capital. Within these factors, Say includes personal characteristics such as experience, judgement and perseverance that are considered to be scarce. Therefore, entrepreneurs, who simultaneously posses these characteristics, will be successful. Another key issue regarding Says approach is the ability of the entrepreneur to overcome difficulties, solve unexpected problems, and exploit existing knowledge. Several scholars, such as Hebert and Link (1988), have criticised Say and his entrepreneur as being nothing more than a skilled worker with managerial capabilities. Others, such as Casson (1982), have pursued this route and offer more contemporary insight into Says entrepreneur. 1.1.3 Innovation Only in the early 20th century did Josef Schumpeter (1934, 1939) introduce innovation to the literature on entrepreneurship. Schumpeters entrepreneur operates outside conventional technology and introduces significant changes to the production process, rather than small improvements. So, the entrepreneur either does new things or does things that are already being done in a completely new way. According to Schumpeter this involves: new product creation, new production method, new market opening, new source of supply capturing, or new industry organising.
In his view, the entrepreneur is an exploiter (similar to Say) and his actions are responsible for shifts within business cycles and economic development. Schumpeter will be remembered for his term creative destruction that
depicts the entrepreneurial activity. A wave of innovation hits the market, discards traditional products and processes, and is followed by imitation on behalf of the competition. This will lead to a new point of equilibrium. This means that entrepreneurial profit is limited to a specific time interval, within which the market is unstable and the entrepreneur maximises profits, unless the entrepreneur continues to innovate. As far as personality is concerned, Schumpeter viewed the entrepreneur as a unique personality, an unusual creature who relies on instinct rather than calculations. He also argued that profit is a residual and not a return for being a production factor, and that entrepreneurs are never risk bearers compared to capitalists who are. His latter point has been heavily criticised by modern scholars, mainly for the distinction between capitalists and entrepreneurs. 1.1.4 Skill Differentiation Casson (1982) is the most prominent modern economist, who attempted to approach entrepreneurship by combining former economic literature. His theory is mainly twofold. Initially, Casson sees the entrepreneur as an individual who co-ordinates production resources and, in order to do this effectively, possesses extraordinary skills. These skills help the entrepreneur to put in use the limited resources and produce an output that is unique, based on his or her abilities. The backbone of the Cassonian entrepreneurial process is the decision making process that reallocates resources. So, the entrepreneur needs to be able to have power over and manage resources, and, therefore, needs capital. In Cassons view, regional differentiations in entrepreneurial activity relate to personal wealth (such as home ownership). Secondly, Casson believes that change is the companion of
entrepreneurship. To support this theory, he describes a situation where demand and supply for entrepreneurs is similar to the demand and supply curve of perfect competition markets. As expected rewards for entrepreneurial activity increase, the number of entrepreneurs increase, while the lower the reward the higher the demand for change agents (i.e. entrepreneurs) is. In his work, entrepreneurs elicit change, and change elicits entrepreneurial opportunities. So, the reader might comment that the most capable entrepreneur will be the one who initially sees the expected rewards, while others are still blindfolded.
1.1.5 Career Mobility In modern econometric thinking, theories are being developed in order to examine the actual choice of an individual to either become an entrepreneur or an employee the choice between self employment and paid employment. There are two main streams of research, one that considers that all individuals are the same using the word homogeneous and the other one that people are different using the word heterogeneous. The approach that considers all workers to be the same and possess similar characteristics, has modelled several propositions that are rather advanced and detailed. In general, the main focus of this approach is to understand when people choose to become self employed over being employees relative to factors such as income, risk, risk aversion and the equilibrium number of entrepreneurs in a specific market. The reader may find it interesting to look into some of these theories, as formulated by several researchers, such as Appelbaum and Katz (1986), Kanbur (1979) and Sheshinski and Dreze (1976). These models, however, consider for reasons of simplicity that there is no cost in switching from one career choice to the other, while in reality there are both direct financial and sunk costs innate in these decisions. Moreover, mobility between paid employment and self employment is not as straightforward within a real market place as it is considered in this model. The reason that researchers have chosen this rather simplifying approach is that they need to examine the mobility dynamics within the workforce, identify key issues and then gradually move over to applied research. So, results are still ambiguous and no clear explanations have been given by such models. However, there have been attempts to incorporate career mobility cost within these models, for example by Dixit and Rob (1994) and Parker (1997).
The second approach, the one that considers people to be different in matters such as their entrepreneurial ability, builds on the early economic theories of entrepreneurship. Casson as described above can be considered as the modern economists that brings together these streams of thought. The key theorist behind the heterogeneous model of entrepreneurship in modern economics is Lucas (1978). Lucas developed two sub-models, one static, where all is equal apart from individual managerial/entrepreneurial abilities, and one dynamic, where firm size is considered differentiated and variable.
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Lucass static model shows that there are three types of workers, entrepreneurs, marginal entrepreneurs and paid employees. Within this model it is assumed that more able entrepreneurs run larger businesses. His dynamic model proposes that when it is less likely to have more entrepreneurs, increases in per capita capital decrease the number of entrepreneurs and increase the firm size. For his latter model, evidence is not straightforward and, thus, many economists have attempted to expand it and reach conclusions. 1.1.6 A Final View of Economic Theories As a final comment, it is essential to stress out that economists have shifted their focus from a theory building process to detailed analysis of econometric models. Historically, the initial economic thought on
entrepreneurship came form unconventional thinkers, such as Schumpeter, who were not accepted by their peers. This non-mainstream output, that opened economics to the fields of psychology and business, is now the groundwork for highly theoretical models.
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1.2 Psychology Many psychologists have devoted their research activities to the entrepreneur. Obviously, psychologists are not looking into economic parameters or the contribution of the entrepreneur to the society, but focus on understanding and describing the person that chooses to become one. During recent years, economists have started to include in their research parameters from the psychological school on entrepreneurship, in order to do cross-discipline tests on entrepreneurial and self-employment models.
There are four key personal traits that have attracted the attention of the psychologist, as outlined by Amit, Glostein and Muller (1993). These traits are the first four ones that follow and are linked to the entrepreneur in a way that entrepreneurial activity can be explained, along with the choice to bear risk. Since the list of personal characteristics that have been looked into by academics is much longer; further elements of the psychological approach to entrepreneurship are listed below. 1.2.1 The need for achievement In 1961 David McClelland presented one of the first systematic approaches towards understanding the entrepreneurial personality. In his work he attempted to provide an entrepreneurial profile; the same thing that most psychologists tried to produce. So, in his seminal work McClelland introduced the business heroes, entrepreneurs that inspire younger generations and promote the essentiality of entrepreneurial activity. In this direction, he identified the key characteristic of the entrepreneur to be the need for achievement, rather than the desire to make money. He labelled this need for achievement as n-Ach and derived a tool with which one can measure it. He argued that societies with a higher measure of n-Ach on the average produce more active entrepreneurs and, thus, faster economic growth than societies with lower n-Ach on the average. People with high scores of nAch will seek independence and will pursuit more difficult tasks to undertake. Sources of higher n-Ach include: Parents who encouraged independence in childhood. Praise and rewards for success. Association of achievement with positive feelings. 12
Association of achievement with one's own competence and effort, not luck.
A desire to be effective or challenged. Interpersonal strength.
So, according to McClelland, the most satisfying thing for the entrepreneur is the recognition of the success, and not the success per se. He also introduced two other measures, n-Aff (for Need for Affiliation) and n-Pow (for Need for Power), which have further contributed to the understanding of human action and interaction. In general, apart from being high achievers, McClelland described entrepreneurs as individuals that are inclined to: be proactive and committed to others, take personal responsibility for their decisions, prefer decisions with moderate amount of risk, crave feedback on their performance, and dislike repetition and routine.
1.2.2 Internal Locus of Control Another psychological view of the entrepreneur suggests that individuals that choose entrepreneurship over paid work have the innate belief that their performance is a result of their own actions, rather than other peoples activities or external factors. This is called in psychology internal locus of control meaning that the centre of control lies inside the person, rather in someone elses or fates hands. Therefore, it has been argued that people with an internal locus of control will choose self-employment over dependent employment. Rotter in 1982 derived a tool to determine the location of an individuals locus of control. This metric scale helped in the direction of empirical tests regarding this theory. However, different studies using the Rotter Scale give us differentiated results, and the internal locus of control theory is therefore considered to be controversial.
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1.2.3 Risk Taking Propensity Entrepreneurs are considered to be individuals with less risk aversion than the ones that choose employment. The key element of this entrepreneurial trait is the difference between the attitude towards risk and the actual or perceived level of risk. So, entrepreneurial behaviour is directed by both the individuals attitude towards risk taking and his or her understanding of the complex business environment. 1.2.4 Tolerance of Ambiguity Furthermore, Entrepreneurs are described by scholars such as Timmons in 1976 as individuals that, compared to others, can better handle complex and unstable working environments. This means, that people who chose self-employment over paid employment, are comfortable in venturing within unstable and dynamic business circumstances. 1.2.5 Type A Behaviour Entrepreneurs demonstrate behaviour characterised by aggression,
competitiveness, striving for achievement and impatience (Boyd, 1984). 1.2.6 Criminal Propensity This stream of theory claims that entrepreneurs are people that dont fit in with the rest of the society. They are described as misfits or displaced individuals that operate far from the societal mainstream. Moreover, entrepreneurs are considered to be capable of illegal activities and criminal behaviour (Shapero, 1975; Kets de Vries, 1977). The latter proposed in his work that problems regarding an individuals childhood make it difficult for him or her to accept authority or work within teams. Hence, they start out on their own and try to increase their self-esteem, which is considered to be low along with the individuals self-confidence. This theory has been very intriguing for researchers and many have tried to identify empirical evidence. However, although several studies both psychological and econometrical have located empirical findings that back this proposition, other surveys have managed to negate this theory.
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1.2.7 Independence and Job Satisfaction Another significant issue surrounding the entrepreneurial personality is the most attractive characteristic of self-employment, independence. The selfemployed individual can arrange time and effort to suit ones own needs and expectations. This is commonly called being ones own boss. This notion goes back to Knight (1921), but non economists have also focused on it. Recent economic studies have been looking into why individuals remain self-employed, although they could be earning more if working for someone else. Hence, the term job satisfaction is introduced, which is not always related to pay and includes other sources of satisfaction that are unique to each individual. So, studies have shown that self-employed individuals and entrepreneurs consider that important work related issues, such as initiative and the work itself are more significant than pay and security (Taylor, 1996). However, other studies showed that job satisfaction is not necessarily related to overall satisfaction, since the self-employed work longer hours and are solely responsible for any problems of their work (Parasuraman and Simmers, 2001). So, job satisfaction appears to come at a cost that has to do with work related and personal life induced stress, which is on its own a reason to choose paid employment over becoming an entrepreneur. Ultimately therefore, independence is a key variable in the choice of employment status. 1.2.8 Over-Optimism Psychology has been looking intensely into individuals that appear to be over optimistic, especially about situations that are not completely under their control. Entrepreneurs appear to be systematically overoptimistic, compared to other people within the same market. Several scholars have tried to establish over-optimism as the key feature of the entrepreneur, the feature that can explain all other essential psychological traits of such people and definitely the one of risk attitude. Cooper, Woo and Dunkleberg (1988) identified within their sample of entrepreneurs what they called entrepreneurial euphoria, namely the belief of entrepreneurs that their chance of succeeding is much higher than the one of others in the same market. However, subsequent studies showed that over-optimism is not only present within the community of the self employed, but also within the one of paid employees. Therefore, over-optimism is considered to be more of a
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cultural tendency, rather than a personal trait (Arabsheibani et al., 2000). In this study though, it was identified that entrepreneurs were systematically more over-optimistic than paid employees. Hence, it could be concluded that in an over-optimistic society, individuals that choose self-employment over other wealth creating options will belong to the group that has the highest optimism rates.
A question that economists have been trying to answer is how is it possible for over-optimism to dominate the market, taken into account that over-optimism deviates from rational economic behaviour especially in terms of maximising returns. So, although it is rationally expected that realists will dominate in the market, while over-optimists will not sustain, there are several reasons to claim the irrational: When the returns of entrepreneurial activity become equal to the ones produced by paid employment, realists will choose to work for someone else, while over-optimistic individuals will remain in the entrepreneurial arena (de Meza and Southey, 1996). Over-optimists will work harder and save money in cases of failure, in order to compensate for problems that arise from their skewed belief of the market (Manove, 2000). Over-optimistic individuals will hardly copy business practices that are existent in the market. They will probably follow what they consider to be innovative and, in order to find that, they will feel confident to explore their environment. So, they are highly probable to access information that might offer a competitive advantage (Bernardo and Welch, 2001). Over-optimism might inspire outsiders such as investors, customers and suppliers through high self esteem, incorporating ambition and potential.
So, as mentioned previously, over-optimism as a personal or cultural trait can be the background for all the previously mentioned entrepreneurial characteristics that psychologists have attempted to sketch, in order to obtain the entrepreneurial DNA.
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1.2.9 Criticism of the Psychological Traits Approach The psychological traits theory of entrepreneurship attempts to outline the profile of the individual entrepreneur, by identifying specific areas in which he or she differs from the rest of the society. So, this approach has received broader criticism, mainly because theories have been formulated over the years, but no unique set of characteristics has been outlined. The main stream of criticism relies in the fact that even under the assumption of an entrepreneurial personality, market factors and universal circumstances also play such a significant role in the entrepreneurial activity that one cannot attribute success or failure to one specific personality type. Also, it is being argued that this approach to entrepreneurship seems to be personifying all the desirable characteristics of the ideal businessperson (Kaufmann and Dant, 1998). So, although this stream of theory offers great insight and understanding of the various personal aspects of entrepreneurship, it is agreed that psychological factors are not sufficient (or even necessary) conditions to explain economic activity by the self employed and entrepreneurial individuals.
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1.3 Personal, Family and Social Issues Apart from the economic and psychological theories, one can make various assumptions about individuals that choose self employment and
entrepreneurial activities as a career path. These assumptions have been formulated mainly by sociologists and looked into by researchers to identify correlations and trends. The ones that follow are by no means exhaustive, but represent the major concepts of personal and interpersonal circumstances 1.3.1 Marriage Theoretically, it is argued that entrepreneurs are more likely to be married than not married, mainly for five reasons: 1. The wife or husband can contribute capital for the start-up or expansion of a business. Capital that is informal and may even come from the spouses family, without the usual expectations that investors may have regarding the return on their capital. 2. A key element of family businesses, and thus businesses of people that are married, is that the family provides cheap or free labour, below market rates, in order to suit the needs of a growing business. On the other hand, the income of the non-entrepreneurial spouse is often regarded as the safety net that will protect the family from financial problems in case the entrepreneurial activity suffers under temporary or long term problems. 3. Since entrepreneurial activity embodies stress, spouses may offer emotional support and help overcome frustration. 4. Being married offers in many economies benefits regarding taxation. 5. In general, entrepreneurs are older in age and older members of the society tend to be married.
Of course, there are also some contradicting theories, of which the major one suggests that married couples with children will probably opt for guaranteed and stable income, rather than risky entrepreneurial opportunities.
In general, studies have demonstrated that there is a positive correlation between entrepreneurial activity and marital status.
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1.3.2 Health and Disability It has been argued that people who need to build their career around a significant personal issue, such as long term health problems and disabilities (physical or mental), will choose self employment. This is because they can set up their daily schedule taking into account specific restrictions of time, place and activity. Also, in certain societies, employer discrimination regarding health and disability might be that dominant in the market, that people suffering from illnesses or having visible disabilities might be excluded from it. It is also notable that government policies (especially in the European Union) which aim at alleviating such discrimination, focus both on employer benefits when hiring disabled individuals and self-employment subsidies for people with adequate or specialised knowledge.
On the other hand, it has been shown that self employment can be demanding in time and effort, and thus a growth oriented entrepreneurial activity might be the wrong choice for individuals that face physical or mental constraints. Moreover, health problems and disabilities might force the individual to pause his or her career for extended time intervals and put significant amount of money in dealing with health issues associated with their condition. Self-employed people have to take care of themselves, while employees are taken care of the employer and the public social and health systems.
Studies have not managed to demonstrate a specific correlation between ill health or disability and entrepreneurship. An explanation might be that self employment and entrepreneurial activity, under these personal health circumstances, might be different among several industries and varying disabilities. 1.3.3 Age, Education and Experience As with marital status discussed previously, older and/or more experienced individuals are likely to become entrepreneurs, because: 1. The higher the age of an individual, the more likely he or she will have developed an adequate network of other individuals that will supply resources for the entrepreneurial activity. Moreover, through these
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networks, entrepreneurial opportunities become identifiable and accessible. 2. It is expected that as a person grows older, capital is accrued that can be used to finance and support a start up. Such capital, both in the form of money as well as intangibles (knowledge, experience, networks etc), comes from personal work, relation to other people and inheritance. Many entrepreneurs have been recorder to kick off their career as employees, and to switch to self employment later on. 3. In cases of mandatory retirement, early retirement schemes or downsizing, older people are keener on using self employment as a way out. 4. Retired individuals might not want to stop working, for both personal and financial reasons. Therefore, as they dont have the physical endurance or mental ability required for employment, they might choose self employment, in order to set the pace and personally manage working hours.
On the other hand, older individuals might be less risky and willing to pursuit entrepreneurial opportunities, than younger ones. Moreover, as high potential entrepreneurial activities require long hours and increase work related stress, older individuals might not be able to cope under such conditions. So, several descriptive studies across the globe show that self employment (and mainly start ups) is situated under normal circumstances around the midlife of the workforce. Also, there appears to be a difference among the willingness to become self employed and actually becoming self employed. Blanchflower, Oswald and Stutzer (2001), identify that the interest in self employment decreases as age increases, as the actual self employed increase as age increases. However, a key issue regarding this approach to entrepreneurship is how one describes and measures experience, as it is not straight forward that experience is linked to age. As far as experience is concerned, it has been identified that previous self employment experience (even failure) is positively correlated to the willingness to pursuit self employment later on in life.
The counterpart of experience, education, appears to have an ambiguous

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relation with entrepreneurial activity, too. If one considers education as an investment, it is obvious that the more an individual invests in his or her education that more returns will be expected. Although entrepreneurial activity might offer significant returns, these will probably come after several years of low income. On the other hand, well educated employees will probably start off their career with higher salaries and will experience the return on their investment much faster. However, better educated individuals will have better market information and will be able to identify business opportunities. Moreover, educated professionals and highly skilled craftsmen are more likely to be able to support a self employment activity, through the uniqueness of their learned skills. However, it is not said that within formal education (no matter how high the level) the individual will receive the necessary knowledge to pursuit and manage an entrepreneurial venture. Hence, although many scientists develop new products through research within their education, they usually associate themselves with businesspeople in order to market the product. It is also notable, that entrepreneurs from older times are rather different in education from the modern ones. Entrepreneurs that established their businesses sometime in the middle of the 20th century (especially in Europe after World War II) are sometimes not educated at all or have intense education regarding their craft. On the other hand, modern growth oriented entrepreneurs have invested time and effort in their education and also try to gain the necessary business knowledge, in order to run their business. In general, studies display contradictory results and a direct relation between education and entrepreneurial activity is not identified. The findings appear to be industry specific. 1.3.4 Family The family as a social construct is the channel through which society passes its values, beliefs and overall cultural elements on to its younger members. Apart from the societal value system, family is argued to offer role models and secondary experience to the children. Parents, grand parents and close relatives demonstrate through their life choices the effects and results of choices. Hence, the role of family in entrepreneurship appears to be crucial, in that it transfers from one generation to the other explicit experiences regarding work ethics and career choices. One could identify two key
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elements that incorporate the transfer of experiential learning, parental self employment experience and business success (Dunn and Holtz-Eakin, 2000).
So, if one could argue that entrepreneurship runs in the family, it is highly probable that the experience the parents made with self employment was positive and inspired the children, offering a promising and rewarding goal. On the other hand, negative entrepreneurial experience (not necessarily finance related, but also possible negative effects on the family life and the individual health), might drive the children away from the self employment career option. In general, self employed parents offer their children a broad spectrum of business management knowledge, capital management and the
understanding of risk. This informal schooling might not even be planned, but incorporated in the family life through activities such as the Sunday family dinner. Moreover, if a business exists in the family that might be passed on to the next generation, children are more inclined to self employment and might strive to prove their ability to inherit the family business. Finally, the existence of a successful business in the family, might secure the essential capital needed to start a new venture by the children. 1.3.5 Unemployment Research on entrepreneurship has been looking for a correlation between unemployment and entrepreneurial activity. Considering unemployment, it is important to differentiate between structural unemployment that comes from major changes in an economys industry and frictional unemployment that includes those individuals that are between jobs. Governmental policies have been attempting to reduce structural unemployment by offering subsidies for and supporting self employment, and fostering what is called the enterprise culture or the entrepreneurial mindset. On the other hand, other governmental policies that include subsidies to business for employing people, attempt to reduce frictional unemployment. Hence, it becomes clear that unemployment rates are negatively correlated with entrepreneurial activity and this is why governments need to intervene. It has been shown that being unemployed does not mean that the individual will pursuit a career in self employment, especially when the social system offers significant support to the unemployed and their families. The debate on the entrepreneurial
22
propensity of the unemployed is closely related to the one of entrepreneurship of need relative to the one of opportunity, discussed further below in the text. 1.3.6 Regionality A further point of interest for the scholar of entrepreneurship is that entrepreneurial activity displays a regional variation. Even within cities, some areas appear to be more entrepreneurial than others, wider geographical areas have more per capita self employed and some countries are more entrepreneurial than their neighbouring ones. Over time, several answers have been offered to explain this phenomenon. These include the: level of workforce education, accessibility to resources and markets, tradition and role models, and availability of capital.
Moreover, it is essential to differentiate between rural and urban areas, since in each of them different types of entrepreneurial activity are feasible, especially when one takes into consideration the population movement from rural to urban areas. This is also supported by governmental subsidy policy, through which entrepreneurs in rural areas are entitled to more funds than their urban competitors, in order to retain human capital in such areas. 1.3.7 Immigration and Ethnic Minority Ethnic minority entrepreneurship is becoming day after day more important for policy makers and researchers in the area of entrepreneurship. Immigrants and ethnic groups within a society appear to behave differently in regard to venturing than the main culture of the host country would suggest. For many years ethnic groups have been forming minorities in the developed economies, such as the USA, Australia and Germany, and nowadays a new influx of immigrants is shaping a more diversified economic population in the rest of the western and developing countries. Also, in most post-socialist economies of Eastern Europe and Asia, due to population movements and unclear turf dissemination, significant ethnic groups find themselves in now independent countries. Hence, for Europe and all the developing countries that are in the wider European and Asian continent, immigrants and ethnic
23
groups offer a significant input to the local and national economy.
Entrepreneurial theory assumes that immigrants and ethnic groups are attracted to entrepreneurial activity as a way to economically advance and avoid poverty (Sanders and Nee, 1996). Also, it is widely suggested that immigrants and ethnic groups suffer under employment discrimination, both in form of social discrimination and in form of the inability to work legally (many financial immigrants reside illegally in the country that hosts them). As far as an indication is concerned on where the current situation is leading, one might look at the USA, where immigrants have been a key economic growth tool. In this country, ethnic groups that belong to non-black groups such as the Chinese, Pakistani, Greeks, Italians have self employment rates that exceed the average of the total USA population. This however does not hold true for all ethnic groups, and therefore the assumption can be made that self employment propensity is related to the immigrants culture and level of employment discrimination. In countries that ethnic minorities have become an issue of importance recently, ethnic entrepreneurship takes mainly two forms. The first one is related to services and overall entrepreneurial activity that focuses on members of the ethnic group, such as food markets, restaurants, telecommunication, money transfer systems, leisure and entertainment, and other services. A possible explanation for this is the social discrimination that ethnic groups face, which does not allow them to either find products and services or take part in the daily activities of the host countrys dominant culture. The second form deals with jobs and activities that the members of the local workforce are not anymore willing to do. These jobs are usually related to manual activities, such as builders, farmers, cleaners etc. Also, specialised skills not found in the workforce of the host country, such as cooks or translators, become a competitive edge for immigrants.
Economic literature refers to different types of factors against ethnic groups that might affect both positively and negatively ethnic entrepreneurship: Employer discrimination. Access to capital discrimination. Consumer discrimination. Positive returns on entrepreneurship (relative to employment). 24
Ethnic enclaves and geographical clusters where the specific ethnic minority is denser than elsewhere.
The entrepreneurial propensity of the culture of each ethnic group. The existence of role models.
Finally, it is suggested that immigrants are more likely to become entrepreneurs compared to native workers, for the following reasons: Immigrants tend to be more educated than native workers, especially of developed countries. Mainly because education in developing countries is considered a way out of poverty. Immigrants have a secured market to sell their products and deliver their services. Also, they have better access to ethnic resources and social networks. Many immigrants intend to return to their home country after they have accumulated some wealth, and entrepreneurial activity appears to be the best way to achieve this goal. Immigrants face problems with cultural assimilation, communication, discrimination and/or professional accreditation that is not valid in the host country. Immigrants tend to be risk-takers, if taken into account that leaving their home country is an action that involves itself high risk. In cases of illegal immigrants, self employment often avoids detection by authorities. Immigrants tend to join occupations and industries that have themselves high levels of self employment. 1.3.8 Female Entrepreneurship It is generally accepted that differences exist in all societies on how male and female workers earn their income. In employment, we often refer to the glass ceiling which does not allow women to achieve senior positions in a company, in contrast to their male counterparts. Also, it is of common knowledge that women tend to earn less than their male counterparts for similar jobs. The same is valid for self employment. Fewer women are self employed and entrepreneurially active than males. Also, women appear to be entrepreneurially active mainly in the services sector, with some industries still
25
being dominated by males. So, female entrepreneurs are mainly focused on sales, personal, financial and other services. On the contrary, female entrepreneurs are not found in industries such as construction. In Europe, rates of female entrepreneurship range from 20% in the UK to 40% in Belgium. In most developed economies, female self-employment is increasing rapidly and faster than male self employment. It is suggested that this has both to do with societal acceptance of females as economic agents, as well as the fact that developed economies tend to focus on service sector activities, as they outsource more traditional ones. Hence, since female
entrepreneurship is higher within the services sector, moving from production to services enhances their entrepreneurial potential, too.
Goffee and Scase (1987) published a research performed in the UK that looked into the key differences between female and male entrepreneurship. They suggest that there are two main influences on female entrepreneurship. Firstly, they refer to entrepreneurial ideals, that incorporate the role of women in the economy and which has been for many centuries a supportive role to the choices of their partner. In this sense, women have been for centuries domestically active and only in the last years have been allowed social norms to earn money themselves. Secondly, female entrepreneurial propensity is affected by the extent to which women themselves adhere to conventional gender roles. These two parameters become of special importance when imposed to different social and religious backgrounds. In this direction, it is also essential to note that child care and household activities are also related to females in modern societies and therefore affect both the extent and scope of female entrepreneurial activity. In cases of heavy household burden, self employment can be the solution for female workers who cannot be full time employed.
As a final note on female entrepreneurship, it is of importance to underline the fact that when measuring female entrepreneurs, one has to differentiate between real and dummy female self employment. By dummy we refer to the fact that in many countries, although the male partner is running the business, as far as authorities are concerned the female partner is the owner. This happens for a variety of reasons, such as taxes, legal aspects and social
26
security benefits. In many of these cases, women have no say in what relates to the business and in some extreme ones, they even might be harmed financially and personally by their husbands business choices.
In general, female entrepreneurs face following issues: Discrimination. Time flexibility (child care, household etc). Household contribution of the partner. Education potential and education barriers. Relative earnings and demand for female workers in the market. Less self employment income than their male counterparts (Aronson, 1991).
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1.4 Macroeconomic Factors Apart from the economic perspective, the psychological theory, and other personal, family and social issues, there are some macroeconomic factors influencing entrepreneurial activity. These factors differ from the preceding ones through the fact that they are driven by man. Decisions on economic development, industrial structure and government policy result from planned human activity, and directly affect the parameters discussed in the personal, family and social issues part. 1.4.1 Economic Development Economists have been trying to relate economic development to
entrepreneurial activity. However, apart from several theories, empirical findings do not allow us to draw any definite conclusions on the connection between overall economic development and any aspect of entrepreneurship. It is important though to identify the three different ways in which economic development is facilitated. These are: 1. Growth of capital stock. Capital is one of the key elements of entrepreneurship, and when more capital is available it is assumed that entrepreneurial activity will be facilitated. 2. Technological progress. Technological progress is imported as well as endogenous to the entrepreneurial activity. New technology is some times adopted by the entrepreneur, while in other instances developed through the knowledge base that is established by past entrepreneurial activity. 3. Endogenous increase of personal wealth. In the case that the entrepreneur or the worker will accumulate wealth from own work, it is expected that this wealth will be directed to new or further entrepreneurial activity. 1.4.2 Industrial Structure As policy or economic development change an economys industrial structure, new work patterns arise. Demand for different kind of education, skills and work force characteristics in general arises. In this sense, entrepreneurial activity is affected when economies move towards service based
28
structures. Self employment and entrepreneurial activity is more prevalent in the service sector, mainly due to the low entry barriers and initial investment requirements. In general, structures including one to one labour intensive personal services, seasonal jobs and jobs that require varying skills attract higher entrepreneurial activities. So, manufacturing and industrial activity attracts the lowest rates of self employment.
In many cases, changes in industrial structure of a countrys economy result in structural unemployment, which in turn has an effect on entrepreneurial activity (as depicted previously). 1.4.3 Government Policy Governments, especially the ones of developed and developing countries, take several decisions that indirectly or directly affect entrepreneurial activity. One major issue is the extent of employment protection. In terms of employment protection we refer to minimum wages policy and the ability of the employer to terminate contracts with employees. When there is no minimum wage policy and employees are not protected by law, it is highly possible that some will turn to self employment, since the opportunity cost is lower. On the other hand, a strict minimum wage policy and employee protection law will push people towards employment. However, in this case employers are less willing to employ people, since costs are higher and not flexible, and might rely on extended working hours or part time employment to deal with increased demand periods. This is especially true for highly seasonal industries, such as tourism. Hence, strict minimum wage and employment protection policies are considered as barriers to entrepreneurial development.
Retirement policies, especially from the public sector, often lead people to self employment. This occurs partly for income reasons and partly from situations where retirement incentives to leave the service are given to young individuals. In such cases, partial retirement is a way of continuing work. If however, the welfare state is larger and pensioners can live optimally and according to their needs, self employment rates are lower.
29
Interest rate policies affect mainly financing options within the economic system. Higher rates will make borrowing more expensive and slow down entrepreneurial activity, while lower ones will enhance capital investment. Also, higher rates will push people to saving money, rather than spending and, hence, businesses that offer non essential goods or services will experience a drop in sales. Several studies have shown a negative correlation between interest rates and self employment. Moreover, when interest rates increase, less new businesses are established and firm deaths increase.
In recent years, governments in Europe have been looking towards entrepreneurial activity in order to solve structural economic problems. Starting with the UK and what was named enterprising culture and ranging till today, governments are trying to enhance new firm creation, in order to lower structural and regional unemployment through new employment opportunities within the growing new firms. In this direction, the EU has been offering incentives for firm creation and growth, firm networking, and research and development. These initiatives have been focused on sectors that are different in each country and theoretically enhance the national competitive advantage. These policies are further supported by de-regulation initiatives in areas that have been governmental monopolies for many years, such as energy, telecommunication, transport etc. More on the policies that support entrepreneurship will be discussed in the material prepared for the second part of this course.
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1.5 A Final Look at the Entrepreneur In order to summarise the above literature on entrepreneurship and the entrepreneur, it is useful to look at two models that manage to categorise entrepreneurs. These more realistic and empirical models, might offer the opportunity to link lived experiences with the theoretical background offered above.
Firstly, Webster (1977) offers four broad categories of the individual entrepreneur, several of which are analysed later in this text: Cantillon Entrepreneur (the one that brings resources together). Industry Maker (establishes a new industry). Administrative Entrepreneur (Intrapreneur). Small Business Owner.
Moreover, Webster also suggests a similar segmentation of entrepreneurial ventures: Large Payoff Venture A business where the expected results are significant and therefore many participants share risk and income. Large Payoff Venture The same as previously, with the risk taken however by few key investors. Small Payoff Venture A business where the expected results are moderate and therefore only a few investors participate.
A second approach is the one of Landau (1982), who derived the matrix shown below, which adopts a description for each entrepreneur relative to risk and innovation levels: Gambler (High Risk Low Innovation). Consolidator (Low Risk Low Innovation). Dreamer (Low Risk High Innovation). Entrepreneur (High Risk High Innovation).
31
Figure: Landaus Classification of Entrepreneurial Types
Finally, in order to answer the practical question that is of importance at the final stage of this analysis, the reader should be able to identify different types of entrepreneurs depending on their background. The understanding of this will offer the opportunity to move on to more in depth reading in the field of entrepreneurship and a more clear view of the forces that bring people to self employment and entrepreneurial activity. According to Wickham (2001), the following types of entrepreneurs can be found in the market: the inventor and technical innovator, the unfulfilled manager, the displaced manager, the young professional, and the excluded: e.g. ethnic or minority entrepreneurship.
In order to draw a real-life parallel of these theoretical approaches to entrepreneurship, the reader can find below a variety of statistical evidence on entrepreneurship. This evidence refers to the European Union and is part of the Eurobarometer on entrepreneurship published by the European Commission in 2004. Each table refers to specific questions that were put to the surveys sample. It is highly advisable for anyone interested to explore such data and read the full report.
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Figure: Evolution of Employment Choice over Time; EU and USA
Figure: International Variance of Employment Choice
33
Figure: Detailed National Variance of Employment Choice
34
Figure: Sample Variance of Employment Choice
Figure: The Reason behind Choice of Paid Employment
35
Figure: The Reason behind Choice of Self Employment
Figure: The Actual Intention of Becoming Self Employed
36
Figure: The Feasibility of Becoming Self Employed
Figure: The Main Risks as Perceived by Future Self Employed
37
Discussion Points: Which economic approach to entrepreneurship do you consider to be the most adequate and why? How do you identify the role of entrepreneurship in the economy throughout the years, based on the evolution of theory? Do you accept the psychological traits approach as a valid theoretical background to entrepreneurship? Can you give explain your answer by practically applying this theory to a well known local entrepreneur? What is your attitude towards risk taking and how does this relate to your cultural and family background? Why would your government want to support entrepreneurship in your country and how would you as a policy maker decide to support it? What effects on the national economy result from increasing female entrepreneurship and self employment? What is the industrial structure of your local economy and where do you think that entrepreneurial opportunities lie? What is the ethnic minority status in your country and how do existing minorities act entrepreneurially?
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2. Introduction to the Entrepreneurial Process

Learning Objectives: After having read chapter 1.2 you should be able to: Understand the levels of change that entrepreneurship makes. Identify the components of the entrepreneurial process. Understand the concept of the entrepreneurial mindset.
In
the
previous
part
we
discussed
the
theoretical
background
of
entrepreneurship and many of the aspects that researchers have looked into regarding its complications. In order to offer a better understanding of entrepreneurship at this point, it is essential to briefly present the main elements of the entrepreneurial process. A more detailed and practical analysis will be discussed within the material of another Part of this course. 2.1 The Drive behind Entrepreneurial Change The entrepreneurial process is the mechanism through which the
entrepreneur receives the return on his or her investment. It needs the input of a variety of elements, in order to add value on the initial materials and deliver an output. In this sense, the entrepreneurial process is the mechanism by which the entrepreneur bridges the gap between the current situation and what is considered possible. This is the way an entrepreneur brings about change and makes a difference in the market. As a result, even in small entrepreneurial projects, the entrepreneurial vision is the key element in exploiting innovation in order to produce value that is not solely financial.
Hence, the entrepreneur situates his venture within a process where tension escalates between the actual and the possible. This tension has three key dimensions: financial, personal and social. Firstly, entrepreneurship is an economic activity and is mainly concerned with creating stable, growthoriented and profitable businesses. These businesses need to secure financial resources, in order to survive within their competitive environment and to increase the value of the overall market by exploiting an opportunity. So, the first dimension relates to the value creating potential. Secondly, the entrepreneur needs the potential to persist and achieve personal goals. In this
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dimension, the entrepreneur is driven and motivated by a variety of factors wealth creation being just one of them that differ from individual to individual. In several occasions, the force behind the personal potential to achieve might not be the target, but the process. Thirdly, as the entrepreneur operates within a social context, there is both a positive and negative force towards the change he or she wants to drive. Therefore, a degree of social responsibility is essential, in order to bridge the gap between the actual and the possible. In several occasions, society is not ready or willing to follow the entrepreneurs lead.
The Actual
TENSION
The Possible
Figure: Tension in the Entrepreneurial Process
2.2 The Entrepreneurial Process At the centre of the entrepreneurial process, is an individual. The entrepreneur is the agent of change and the economic factor that adds value to the production chain through the exploitation of an opportunity. As numerous theories suggest, the entrepreneur combines a variety of other factors in order to increase his or her wealth. These other factors apparently coexist in the business environment, but no other person has realised their combined value or has not managed to combine them properly. This is why the entrepreneurial process is not the same in every case. However, it is essential to identify three key elements that the entrepreneur needs to put together in order to deliver change and experience success. This means that, in order to have an entrepreneurial process, opportunity, resources and organisation need to be co-existent with a person that will facilitate the overall process. In some cases, the entrepreneur might be a group of people with different roles. Such groups could be family, friends or partners.
Firstly, the entrepreneur needs to identify opportunity. A simple and straightforward definition of opportunity is that it is a gap left in the market.
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Due to this gap, there is potential for wealth creation, by catering for the needs of customers that are either not fully or not at all served. The opportunity lies within a variety of things that could either be absent from the market or that could be done in a different way. The concept behind the opportunity is the idea, so often referred to by successful entrepreneurs. In order to be successful though, the other people in the market, suppliers and customers, need to understand and welcome this idea.
Opportunity
Identification
The Entrepreneur
Attraction & Management Resources
Leadership & Direction Organisation
Figure: The Entrepreneurial Process
Secondly,
after
the
opportunity
has
been
identified
and
the
idea
conceptualised, the entrepreneur needs to lead and direct. This is why one of the key attributes of the entrepreneur is managerial ability, which characterises the way he or she co-ordinates different people. Also, the entrepreneurial process usually suffers under limited resources and the inherent risk of something new in the market requires the best combination of what is at hand. Otherwise, though the target might be reached, the business might experience problems related to capital and cash flow management. Hence, the type of leadership each entrepreneur uses in order to manage the business, affects directly its future. Usually, charismatic leadership is needed to motivate employees and enhance trust as far as suppliers and customers are concerned. The scarcity of resources also forces entrepreneurs to work in networks and support each other in difficult times. These network
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relationships can be formal or informal, based on exploitation or altruism, and have long or short term potential.
Thirdly, in order to realise the opportunity and materialise the idea, the entrepreneur must be in the position to acquire the necessary resources. Resources include money, people, knowledge and skills, and materials. Resources can be tangible and intangible, such as name, reputation and customer trust. In order to exploit these resources, the entrepreneur needs to attract capital of any form that will guarantee their availability. As mentioned before, resources in the entrepreneurial process tend to be scarce and, therefore, apart from acquiring them the entrepreneur needs to exploit them cautiously.
So, in order to have an entrepreneurial process, we need three co-existing factors and a facilitator the entrepreneur.
2.3 The Entrepreneurial Mindset As mentioned above, three elements of the entrepreneurial process need to co-exist so that the entrepreneur can bring about change. So, in the first instance what is required is the existence of an individual that can recognise opportunity, direct an organisation and acquire resources. This individual will become an entrepreneur in the moment the decision is made to combine the three elements. For a society therefore that is looking to be entrepreneurial and to experience economic growth through individual innovation, it is important to cultivate the entrepreneurial propensity of its members. What is needed is a significant amount of latent entrepreneurs that will become active the moment all three elements co-exist. This way, the society secures that no opportunity will be left unexploited and, therefore, growth through entrepreneurial activity will be boosted.
Looking at the person that is needed to facilitate the combination of opportunity, organisation and resources, it is easy to identify the difference between a manager and an entrepreneur. The manager is probably good at organising and leading, and knows how to realise goals with given resources. The entrepreneur, apart from being a good manager, needs to be able to
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identify, screen and exploit opportunities. He or she needs to formulate ideas from opportunities that others cannot see into an effective and realistic business plan. An entrepreneur needs to walk on the clouds and, at the same, time be realistic. This ability to dream and materialise these dreams is what one could call the entrepreneurial mindset.
McGrath
and
McMillan
(2000)
offer
several
characteristics
of
this
entrepreneurial mindset: Passion in seeking new opportunities. Discipline in pursuing these opportunities. Correct choice of the best opportunity to pursuit. Focus on execution (adaptive execution). Involvement of a significant number of other individuals.
In different countries different levels of entrepreneurial propensity and activity can be found. In some countries more people claim that they want to be self employed than actually are. In others it is quite the opposite. Also, in some countries self employment and entrepreneurial activity is the result of overoptimism. Hence, what an economy needs are people that will actually become entrepreneurs by calculating the true level of risk. In order to have this, the notion of entrepreneurial mindset needs to become a key ingredient of the societys culture. This can be achieved mainly through education and role modelling, an effort that has been successful in countries such as Ireland and the UK. Especially in transition economies, where the notion of private economic activity has not been part of the culture for many years, cautious steps need to be taken in order to produce the proper entrepreneurial mindset among the younger generations. When the entrepreneurial mindset is optimised, then the government can enhance entrepreneurial activity by subsidies and supportive measures. The entrepreneurial mindset can be considered the backbone of the enterprise culture.
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Discussion Points: What are the forces behind entrepreneurial activity? Identify two or more entrepreneurs and consider which is the most strong for each one of them. How would you schematically present the entrepreneurial process? How does it interface with other items of the economic activity? What could be the barriers to the entrepreneurial activity? How can they be overcome? How do you describe your personal entrepreneurial mindset in relation to the one of your country? What is the role of education in shaping the entrepreneurial mindset? What type of practical support and instruments should be given to schools to encourage entrepreneurship activities?
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3. Entrepreneurship of need vs. of opportunity

Learning Objectives: After having read chapter 1.3 you should be able to: Differentiate between entrepreneurship of need and the one of opportunity. As mentioned in the previous chapter, in order to have an entrepreneurial process we need four factors to co-exist. The key one is the entrepreneur, the individual that feels the need to pursuit the opportunity, organise the process and attract the resources. The force behind this need to do these three things is not always easy to understand. Obviously, for an individual to be willing to take risk there must be a significant force behind this decision, in order to overcome the resisting ones. In this chapter we will try to differentiate between two kinds of forces.
The first one is the force that pushes the entrepreneur to undertake risk. In this case, the entrepreneur has no obvious reason for pursuing an opportunity other than to increase his wealth and become successful. Hence, the individual is in a position that is not unfavourable for him or his family and when an opportunity presents itself he or she decides to pursuit it or not. In such cases, the risk is sometimes greater, because the individual trades a rather secure financial and personal situation with a risky attempt to achieve more. Apart from financial reasons though, this force might also stem from a need to achieve something, fulfil ones dreams, be successful, etc. So, we call this entrepreneurial activity as one of opportunity, since the entrepreneur does not necessarily need to do something different than he or she is doing at that point.
On the other hand, we have a force that pulls the entrepreneur towards risk. Such cases result from a variety of reasons that make an individual become self employed, because there are no other alternatives. The reasons an individual has no other choice vary. On one side we have strict economical issues, such as satisfying basic needs. On the other hand, one could also
45
include in this case feelings of un-fulfilment, lack of interest or disappointment in general. The latter ones however not being so essential to the survival of the individual. Economic issues usually relate to employment discrimination and are the direct result of the fact that the individual has no way to earn his or her living. Therefore, self employment is the only choice that remains for the individual to cater for personal and family needs. So, this kind of entrepreneurial activity reflects the need of the entrepreneur to reverse the financial situation under which he or she suffers. People that experience employment discrimination might belong to one of the following groups: Women. Unemployed due to structural changes in the industrial profile of an economy. Convicts that return to normal life after prison. Former drug addicts. Individuals with mental or physical disabilities. Ethnic groups and minorities. Religious minorities. Illegal immigrants.
All these groups have in common the fact that they include people with similar problems, which do not allow them either to be accepted by other members of the society or have specific needs regarding their employment. The problems might stem from communication compatibility, lack of skills, past wrongdoings, cultural bias, racism etc. Apart from people that belong to one of the above groups, there are also individuals that have no apparent reason to experience employment discrimination, but might still suffer under it. Finally, in several economies there might be situations when the majority of the society is facing employment issues and is therefore forced to earn their living in another way. Such situations include the collapse of economic activity or post-war periods where the entire infrastructure is destroyed. Such periods include the great depression in the USA in 1929 or the post-war era of the European continent.
Turning to self employment in case of need will usually lead people to grow their business up to a point. This point is defined firstly by the amount of
46
capital they can invest and secondly on their personal aspirations. In the first case, it can be expected that an individual experiencing employment discrimination will have the same problems in attracting capital. In the second case, when the business is up and running, growth might not be the key objective of the entrepreneur. In most cases entrepreneurs of need will set a goal of income that would relate to the salary they would expect from employment. Hence, another key difference between entrepreneurship of opportunity and the one of need is, apart from the starting point, the final goal of the entrepreneur. In the former it will be growth and accumulation of wealth, while in the latter it might be restricted to earning an honest living. Hence, we would be rather discussing small business management than
entrepreneurship. Of course this is not limiting, since the goals in each case are related to the capacity of the individual entrepreneur.
Finally, employment discrimination and entrepreneurship of need might lead their subjects to illegal business activities. The illegality of these activities might range from not paying taxes or registering the business, to pursuing illegal opportunities per se, such as selling drugs, trafficking, violation of copyright laws, etc. Discussion Points: Do you think that entrepreneurs of need have a different approach to business management than those of opportunity? Can an entrepreneur of need introduce significant innovation in a market or is he or she restricted to small scale projects? Can you identify a period in your nations history, when all economic activity was stopped? Did any well known entrepreneurs emerge at that time?
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4. Serial Entrepreneurship
Learning Objectives: After having read chapter 1.4 you should be able to: Understand the concept of serial entrepreneurship. Identify different forces behind serial entrepreneurship. Explain the choice of an entrepreneur to become serial. Classify serial entrepreneurs according to their choices. In several economies it is possible to locate entrepreneurs that appear to be more active than others. Such entrepreneurs might be starting one business after the other and expanding their risk taking constantly. Such entrepreneurs are considered to be serial. Behind the choice of serial entrepreneurship one can find a variety of driving forces that can be split into two main groups. The first one includes entrepreneurs that follow a strategic path to increase their wealth by including in their activities complementary or other businesses. In this case new ventures are set up to facilitate the key idea behind the initial one and the whole process is part of an overall entrepreneurial vision. The second group includes entrepreneurs that, according to the psychological traits theory approach, are motivated mainly by other rewards than money and they feel great satisfaction is setting up businesses.
Following the above, we can define two sub-groups of serial entrepreneurs. The sequential entrepreneur will start a business; bring it to a point and then move on to start the next one. In essence, they handle one business at a time. These people appear to be enjoying the process of opportunity exploitation more than running an established business. Many explanations can be offered, ranging from the adrenaline rush of risk taking to the fact that an individuals competitive advantage is setting up businesses. In any case, the serial entrepreneur will set up the business, fine tune it and then sell it, using the proceeds to start his or her new project. In this context, there have been suggestions that when a business is set up and running, the actual entrepreneurship phase is over. The portfolio entrepreneur will, on the other
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hand, retain management and ownership of his established ventures and move on to create something new. These serial entrepreneurs follow an overall strategy for growth and may have vertical or horizontal expansion in mind. Also, increasing the entrepreneurial portfolio might even be the proper way to handle risk, by spreading it across different activities with different threats.
The special skills needed for serial entrepreneurship are all included in a well established entrepreneurial mindset: Opportunity recognition and evaluation, market analysis, customer insight, securing of capital and decision making ability. This might be the case why some entrepreneurs choose to be sequential ones. On the other hand, portfolio entrepreneurs exist in cases in which the initial idea, the core business concept, is applicable to more than one products, services or even industries, and hence the opportunities appear to be endless.
Overall, Wright et al. (1997) classified serial entrepreneurs as follows: Defensive serial entrepreneurs, who might be forced to exit the initial market they were in. Reasons could be failure, market saturation, floating of the business etc. Opportunist serial entrepreneurs, who are going after the financial gain of the start-up process and are probably short-term oriented. Group-creating serial entrepreneurs, who follow a strategy that includes more than one business. One could separate between those who make deals and buy other businesses and those that create each time the business they require to pursuit their strategic outlook.
It is important to underline at this point the overall importance of failure in the entrepreneurial process. As risk is inherent in all entrepreneurial activity, the possibility of failure is an option for which all entrepreneurs need to be prepared for. In general, failure has a different meaning in each culture and economy. Some cultures embrace failure and understand its value. In order to fail one must try, and by trying the entrepreneur is both aiming at a better tomorrow for him or herself and at the same time will return a part of his
49
earnings to the society. In other cultures failure is not that well received and entrepreneurs that failed once have a difficult time getting on. In serial entrepreneurship failure is important because an entrepreneur that tries something new after a failure might experience varying feedback. There are investors that trust a failed entrepreneur more, because they consider that he or she has learned a lesson. On the other hand, there are more formal institutions, such as banks or even the state that will turn down any loan or support to a failed entrepreneur. Also, the legal aspects of bankruptcy determine a countrys attitude towards failure.
Finally,
one
identifies
family
entrepreneurship
within
the
serial
entrepreneurship context, since in many cases proceeds from an initial entrepreneurial activity are given as capital to the younger generation, in order to pursuit their own opportunities. Discussion Points: Why would an entrepreneur want to be serial? Why would an entrepreneur need to be serial? Can you give two or more examples of entrepreneurs that have chosen to be serial ones for different reasons? Do you believe that the rush of the start-up or the diversification of risk management is more appropriate to explain serial entrepreneurship? How do you perceive entrepreneurial failure in relation to future business activity?
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5. Entrepreneurial Networks
Learning Objectives: After having read chapter 1.5 you should be able to: Describe formal and informal entrepreneurial networks. Describe informal entrepreneurial networks and relationships based on their characteristics. Understand the value of entrepreneurial networks.
Having read the psychological traits approach to the entrepreneurial personality, one could describe entrepreneurs as individualistic and autonomous. However, in recent years, extensive research in the area has developed a new aspect of entrepreneurship. Networks and networking has become a prominent and important research target, in the attempt to better understand the entrepreneurial process. As mentioned beforehand, the entrepreneur has to manage an organisation that tries to exploit an opportunity, based on scarce resources. These resources include, apart from raw materials, capital, skills, knowledge, technology and other that differ from business to business. Hence, formal and informal networking, or what is also called social capital, plays a significant role in the success and growth of the entrepreneurs venture.
It is difficult to define networks and networking, although most people understand grossly what these words stand for. As a basis for discussion, it is enough to define networks as constructs that are based on formal and informal overlapping relationships of the business with its environment or the entrepreneur with other individuals. Hence, networks are continuously being set up by each new business that enters a specific market, and therefore no network remains static. Each new member becomes related with all the others through networking with members of other networks. It is clear then, that a networking process has to offer a lot to an entrepreneur in terms of receiving especially when one is prepared also to give. Networks are primarily transactional.
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The entrepreneur gains from his or her network a variety of things. At a starting point, the entrepreneur might gain access to capital, information and advice. Moreover, innovation can also be a result of networking, observing other members of the network how they deal with or manage novelties. Formal networks include professional bodies, chambers of commerce, alumni associations etc. Informal networks are numerous and range from close friendships to casual meetings with other entrepreneurs over dinner. The benefits of formal networks are obvious, including lobbying and support, while the informal ones offer a different support: extension of strategic competencies, identification of opportunities, contribution to own resources during extra ordinary situations. In this sense, it has been shown that entrepreneurs that have difficult access to informal networks, have access to less free information and are therefore forced to operate with less capital in a broader sense than their peers (Leonard-Barton, 1984). In many cases, entrepreneurs tend to get involved in informal networks even before they establish their business, during the screening stage of the opportunity they have discovered.
Key: Participant in society: individual, household, group, organisation Direct relationship shared between members in an interaction Indirect relationship (influence) shared between members more than one step away from each other
Figure: Example of a Social Network Map In general, entrepreneurial networks have a variety of characteristics that mainly deal with small firms and are briefly depicted below: 1. Morphological Characteristics (pattern and structure) (Mitchell, 1973): a. Anchorage.
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The focus of the network can lie on the business or the entrepreneur, depending on the situation and the years of existence of the business. b. Reachability The anchor of the network as described previously interacts with the other elements within the social construct of the network. The measure of how far and how easy this interaction takes place is the reachablity. One can count number of interactions within the network in order to reach the desired network member. The fewer the interactions, the higher is the reachability. In this sense, one can draw the boundaries of the narrower and the wider network of a business and understand the effort required to acquire resources that are available through this network. Also, in such an examination, one can identify the network members that link this network with other ones. c. Density Networks can be tight or loose, depending on how close all the members are with each other. In cases of networks in which all members interact directly with all other members, the density is at its highest values. On the other hand, if a network member needs to go through several other members in order to reach the objective, the network is considered to be loose. Dense networks often result from family or friend networks. d. Range The range of an entrepreneurial network refers to the heterogeneity of the members in direct contact to the anchor. If multiple resources are available through direct contact we have a diverse network, if not a narrow one. 2. Interactional Characteristics (perception of the relationships within a network) a. Content Content refers to the meaning attributed to each relationship within the entrepreneurial network. Each relationship has a
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different level of intimacy and value for each member, and, depending on these, the member is willing to interact differently within each relationship. Labels such as family, friendship, acquaintance etc describe levels of content. b. Intensity Again, each relationship has a different weight on each member of the entrepreneurial network. This weight defines the willingness to interact, respond to communication, honour obligations and exercise rights that are given due to
relationships. c. Frequency Frequency measures the time entrepreneurs spend or invest in order to interact with their networks and cultivate
relationships. It is important to note that frequency does not necessarily affect the quality of exchange or the intensity of the relationships. d. Durability As networks are dynamic and participation voluntary, durability can describe the time a relationship lasts. If both sides consider the relationship of value, there is a high probability that it will last. This mainly depends on how much each side of the relationship is willing to invest in it over time. e. Direction Direction refers to the flow of power within a relationship. One member might be stronger than the other, and hence the weak one receives support from the strong one. In entrepreneurial networks direction might alternate over time or depending on the issue, while in strong social relationships, such as friendship, direction might not be of importance.
It is important to recognise how networks contribute to the entrepreneurial process. Since no business exists in vacuum, it is essential to interact heavily with its environment in order to achieve its goals. This networking process might not be scheduled in many instances, though experienced entrepreneurs
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try to include in their schedule time to interact with other network members. Finally, it is important to underline that networks are of a reciprocal nature. Each member receives and benefits from the network relationships, but needs to offer, too.
1.1
Discussion Points: Sketch a network of your family, friends and acquaintances. Identify resources that you can access through your network in order to achieve your goals. Identify the formal business networks in your area and describe their services and benefits for its members.
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6. Intrapreneurship and Innovation

Learning Objectives: After having read chapter 1.6 you should be able to: Differentiate between entrepreneurship and intrapreneurship. Describe the enables and barriers of intrapreneurship within an established organisation.
Up to this point, we have referred to entrepreneurship as an event, or a process, that takes place outside all existing business establishments and relates to a new venture. Having mentioned serial entrepreneurship as a phenomenon of continuous entrepreneurial activity by an individual, it is useful to also discuss intrapreneurship. Intrapreneurship refers to the ability of larger and established organisations to act entrepreneurially by taking advantage of their human capital that has a well developed and healthy entrepreneurial mindset. In this attempt, larger businesses tend to move away from bureaucratic structures and capture innovation at its source, enabling the communication of latent entrepreneurial intentions within their structures.
In every innovative larger business, such as 3M, General Motors and Yahoo!, one can identify key employees that facilitate change and introduce innovation. These individuals could be entrepreneurs themselves and operate as change agents within the market. However, these businesses have captured their entrepreneurial talent and rewarded it. Hence, instead of experiencing the phenomenon of the dissatisfied manager, they introduce the role of the intrapreneur. So, intrapreneurs are the entrepreneurs within business constructs, who are given the resources to pursuit the opportunities they have identified. Inherent to new venture creation are apart from risk capital requirements, resource scarcity, knowledge and skills employment, and other key elements depending on the situation. The individual will choose to become an entrepreneur when he or she considers the opportunity costs low and the prospective income significant enough to alleviate risk. In case of intrapreneurial businesses, the entrepreneurial individual can pursuit 56
opportunities within an established organisation, using resources that are easier to acquire than by a new venture, and is rewarded by his or her employer for increasing the businesss value. In a sense, intrapreneurship is entrepreneurship with a safety net. Therefore, returns might not be as big as in entrepreneurial activities, but the risk is much lower, too.
Intrapreneurship can exist as a part of the organisational culture of a business only if it is supported, embraced and rewarded. In order to enhance intrapreneurship, businesses can employ a variety of tools: Intrapreneurship sponsors. Individuals that scout for innovation within the business and clear their schedules in order to listen. Continuous involvement of the initial intrapreneur. In several organisations, the initial concept builder is gradually left out as the project moves to more advanced stages. However, the motivational power and devotion lies within the involvement of the initial intrapreneur, who has to be present in all stages of the new project. Autonomous intrapreneurial teams. Intrapreneurial teams need to work as entrepreneurs. They must have power over their resources and be free to decide. Low level of bureaucracy. The intrapreneur will need to access resources throughout the organisation in all stages of the project; from idea conception to the actual implementation of the idea. Hence, increased bureaucracy will delay the process and might outdate the idea. Acceptance of risk, mistakes and failures. When investing in new projects, an organisation needs to be able to face failure in the same way an entrepreneur would. This failure might come from increased risk or mistakes by the intrapreneurial team. In any case, if failure is punished, any intrapreneurial opportunities that might exist or come to life in the future will be discouraged. Devotion to a philosophy of long-term success. Intrapreneurial activities might not present favourable results within the time frames the organisation is used to. One idea might take longer to
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become profitable than another. So, intrapreneurship requires time and a long-term investment to flourish. Existence of resources for ideas. The intrapreneur and the intrapreneurial team will need resources. The fastest access to these resources is allowed, the fastest the idea will reach the market. Reward system that supports intrapreneurship. Any organisation that wants to enhance entrepreneurship and capture innovation needs to have a supportive reward system. The intrapreneur needs to be rewarded for his contribution, in order to encourage future intrapreneurs to come forward with their ideas. Reward systems might include short and long term pay benefits, education and health benefits.
On the other hand, barriers to intrapreneurship include: The hierarchical structure of the traditional large business organisation that has many separators between lower and higher levels of management. An unfavourable corporate culture that discourages communication and flexible job descriptions. Performance standards and measures that are suited for large businesses, such as short-term profits or cost control. Rigid and time consuming planning procedures. Ownership issues. Human resources mobility. Ineffective reward systems.
Finally, in the same way that we attempted to identify the traits of the entrepreneur in another part of this text, we can also do the same for the intrapreneur. The latter has probably a proven record of managerial capacity and a degree of entrepreneurial thinking. So, the intrapreneur differs from the entrepreneur in two ways. Firstly, the intrapreneur is less of a risk taker and might view the benefits of becoming an entrepreneur and exploiting the opportunity on his own to be not worth sacrificing his or her career. Also, the intrapreneur has an accumulated managerial experience that can be used in
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the new project. Furthermore, the intrapreneur has the choice to become an entrepreneur at any stage of his or her career, while the entrepreneur will find a career change to be difficult. In terms of managerial skills, the intrapreneur has the ability to adopt multiple roles, understand and evaluate the environment, use open discussion techniques to resolve problems and explore possibilities, challenge the organisational culture he is part of, and build a group of supporters something like an intrapreneurial network. Moreover, in terms of entrepreneurial skills, the intrapreneur needs vision and flexibility, orientation towards action, dedication, failure management and overcoming ability, and adoption of self set goals.
In essence, intrapreneurship as a concept is the same as the notion of creating a society that captures innovation in any form. The social entrepreneurial mindset, which represents the average ability of identifying and exploiting opportunity, can be replicated within any large organisation. However, a visionary manager may choose employees of an increased intrapreneurial ability that will boost innovation within the business and make the average entrepreneurial mindset of the group much higher than societys. If innovation is not only considered technological, a highly intrapreneurial business will opt for people of varying backgrounds and skills, who all can identify opportunities and formulate new business concepts.
Discussion Points: Identify an intrapreneurial organisation and explain how it captures innovation? How can one apply intrapreneurship in the public sector or local authorities? Why would you prefer to work for an intrapreneurial organisation rather than start your own business?
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7. Small and Medium Enterprises

Learning Objectives: After having read chapter 1.7 you should be able to: Define Small and Medium Enterprises. Understand their contribution and importance to the economy. Understand their problems and key survival requirements. Describe the differences of entrepreneurship and small business management.
Although this text aims at understanding the basics of entrepreneurship, Small and Medium Enterprises are an important supplement. Small businesses and their management are not the same as entrepreneurship. However, all entrepreneurs start either small or medium. No new venture kicks off at a large size; it usually grows to be one if it is successful. Of course, exceptions to this statement are serial entrepreneurs, who have though started small or medium with their initial venture. Moreover, Small and Medium Enterprises (SMEs) are the backbone of all free market economies. This is why the agenda on such businesses is always topical and in the middle of any economic reform or industrial restructuring. Finally, SMEs are not like larger organisations, and they behave in a different way. One cannot claim that smaller businesses are just large ones in another scale.
7.1 Definition Historically, small businesses can be even found in almost all ancient cultures. As self employment and venturing is part of the human activity, small businesses appeared in order to satisfy customer needs; in the same way that entrepreneurs enter a market. In 2100 B.C., Hammurabi, King of Babylon, drafted one of the first laws on small business. Its main core was actually the protection of consumers against fraud. SMEs have gone far from that period of history, and are nowadays regarded as the solution to many problems of the developed and developing economies. Especially during the 1980s and 1990s there was heavy debate on the future of SMEs and an understanding
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that, if developed and developing economies want to prosper they will have to support them. Following the demise of industrial production in the Western World and the introduction of service based economies, larger organisations and their problems led governments to understand the value of SMEs. A result of this effort was the concept enterprise culture that has been at the core of economic activity in several countries, such as the UK, Ireland, the USA etc.
SMEs are broadly defined by using three parameters: employment, turnover and characteristics. The initial SME definition was supplied by the Bolton Committee (1971) in the UK, when the government financed a research project, in order to understand the small business sector and identify opportunities to resolve social and economic problems due to privatisation and de-industrialisation. So, according to the Committees work, an SME: employs less than 200 employees in manufacturing and 25 in construction, earns yearly less than 50,000 (at that time ), and has a small share of the market, is managed by its owner(s) and operates independently.
It becomes clear, that this initial definition contributed significantly towards the understanding of SMEs. It revealed several issues of interest, such as different employee numbers for different industries and different turnover rates for each activity. Modern definitions are based on this initial one. However, they have managed to resolve several problems regarding the better description of a very large number of enterprises. Nowadays, the EU considers SMEs in three different levels (as of 1/1/2005):
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Table 1 EU Definition of SMEs as of 1/1/2005 Employee s Turnover or Balance Sheet Total 2 million or 2 million 10 million or 10million 50 million or 43 million Characteristi cs
SME Type
Micro
0 to 9
Autonomous
Small
10 to 49
Autonomous
Medium
50 to 249
Autonomous
This definition allows for a better segmentation of the SME population, and identification of issues that might be relative to one sub-group only. The employee number or turnover (or balance sheet) threshold need to be valid, in order to belong to a sub group. The characteristic of independence though, is applicable to all businesses and states that no SME can be linked in any way with another business. In order to consider an SME linked to another business, the former will need to posses 25% of the latter or vice versa. The definition goes into some other details, which are not considered crucial at this point.
According to this definition, in the EU there are approximately 19 million SMEs that represent 99.9% of the total of businesses and employ about 97 million people. In the table below, a brief overview of the SME sector is presented, comparing different sizes within the EU. Data is for the 19 members of the EU in 2003, according to a European Commission (2004) publication on SMEs.
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Table 2 Data on EU SMEs for the Year 2003 Micro Small Medium Total SME
Number of Businesses % of Total Total Employment Average Employment % of Total Turnover per Business % of Export in Turnover 17,820,000 92% 55,040,000 3 39% 440,000 9% 1,260,000 7% 24,280,000 19 17% 3,610,000 13% 180,000 1% 18,100,000 98 13% 25,680,000 17% 19,270,000 100% 97,420,000 5 70% 890,000 12% 40,000 (<0.25%) 42,300,000 1,052 30% 126,030,000 23% 19,310,000 100% 139,710,000 7 100% 540,000 17%
Other
Total
In all developed and developing economies, the number of SMEs has risen significantly since the 1980s. Also, according to the report mentioned above, SMEs dominate sectors of the economic activity that have to do with manufacturing. Micro enterprises, dominate areas such as construction, wholesale, retail and personal services. Larger companies on the other hand, dominate energy production, extraction activities, transport and
communication services, and producer services.
7.2 SME Importance and Survival SMEs are considered to be important for the national economy for a variety of reasons. Mainly, SMEs offer the driving force for future larger businesses. In the case that a small business will grow, it will employ more people, increase the national income and distribute wealth. Also, SMEs are considered important for the advancement of knowledge, development of innovation and satisfaction of isolated market niches. It is estimated that SMEs are 2.4 times more innovative than larger business (according to a study by the U.S. Small Business Administration in 1995). Moreover, SMEs offer invaluable experience to young people that enter the labour market after education. Finally, smaller businesses can better accommodate the needs of special employee groups. Finally, SMEs are the area from which entrepreneurial activity is born. Sadly, SMEs have many problems. These problems often lead to firm death, and it is usual that the number of firms closing down each year
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is almost the same as the ones being established. Both business birth and death rates are very high in the SME sector, especially among the micro and small ones. However, some businesses manage to survive and these ultimately are expected to make the difference.
SMEs have a variety of strengths that include: Financial performance Compared to larger businesses, owners of SMEs experience a higher return on their investment. This is also the reason why some industries are better suited for small rather than large businesses. Innovation SMEs are more flexible and can capture innovation much faster than larger businesses. If the resources are there, they can market products and services very fast. Dependence of Larger Businesses on SMEs In the market, most large businesses depend on SMEs for the delivery of resources, services and other input for their production process. Employment As mentioned beforehand, SMEs can increase employment rates. They have simple employment policies and can usually find the necessary skills needed for them to respond to the market, with cost being the only restriction.
On the other hand, SMEs face several weaknesses, the most important ones being high failure rates and lack of managerial expertise. Also, globalisation and information technology can either pose as a threat or an opportunity for an SME, depending on its flexibility and vision. Moreover, traditional SMEs might face a variety of problems that are results of the key differences between large and small businesses. These are: The owner, i.e. one person, has the biggest influence on the business and so the business is dependent. Small businesses cannot affect their environment, but can be affected by it. Usually, small businesses are single market players and offer their
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products or services to a restricted part of the overall market. Small businesses rely in most instances on a small number of customers. Especially in the business to business sector, small business might even have a sole client. Small businesses will have difficulty raising capital and thus they experience problems in expansion and strategy formation.
7.3 The Difference between Entrepreneurship and SME Management Entrepreneurship and SME management can in many cases coincide, though it is not the same thing. An educated individual within the enterprise culture should be in a position to distinguish between entrepreneurs and small business managers. In order to avoid a misunderstanding at this point, it needs to be stressed out that both entrepreneurial and small businesses are very important for the society and the economy. They are almost equally important, since both supply the economy with income and increase its cumulative wealth. They also both offer employment to people by increasing their production and help alleviate social problems, such as unemployment. However, they are very different in terms of their existence, since they pursue and create new opportunities in a different way. So, although the benefits to the economy are grossly similar, entrepreneurial and small businesses serve different economic functions.
The main differences of entrepreneurial compared to small businesses are in the ways they pursue and create new opportunities, and they fulfil the personal ambitions of their owners. Differences can be identified both on a personal level, entrepreneur vs. SME manager, and on a business level, entrepreneurial vs. small business. The first differentiation is rather subjective and case sensitive. Each business may require different personalities and each entrepreneurial attempt, too. So, we would rely on the personal traits theory for understanding that. However, it is much more straightforward to distinguish entrepreneurial from small businesses. This distinction would definitely also imply some things for the personality of the founder/owner. In order to understand the distinction, we need to look at three different elements
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of business: 1. Innovation Unlike the small business, the successful entrepreneurial venture is constructed upon a significant innovation. The opportunity lies more in the area of an unexploited concept, while in the case of SMEs the opportunity might be replication or slight differentiation of an existing concept. Also, a small business might be introducing an innovation to a part of the market that had no access to it. However, it is still not considered to innovate, it is rather perceived as distributing innovation. 2. Growth We cannot use size of business to determine whether it is entrepreneurial or small; especially when the definition of an SME is in a constant debate among researchers and policy makers. However, there is a more intrinsic approach in terms of growth potential. Entrepreneurial businesses have in fact a much higher growth potential than small businesses, due to the level of innovation applied and the value of the opportunity pursued. This can also imply that entrepreneurial ventures might be slightly riskier than small businesses. An entrepreneurial business might even be the start of a new industry and a multinational company. On the other hand, small businesses usually face market restrictions. 3. Strategy All managerial acts require objectives and goals. These objectives and goals characterise a businesss strategic outlook. Small businesses usually form an informal strategy in terms of objectives that refer to sales targets and cost reduction. Entrepreneurial businesses on the other hand, will go far beyond the near future and formulate a strategy similar to a larger business. In the entrepreneurial strategy, growth targets, market development and share perspectives will be present, as well as the key turning points in the businesses future.
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Figure: The Difference between Small Businesses and Entrepreneurial Ventures
Both entrepreneurship and SME management can create significant wealth for the founder(s). Also, entrepreneurial ventures can be considered to be a subset of the SME set of businesses. Finally, both types of activities belong in the category of self employment and have a much higher risk than paid employment.
Finally, in order to briefly return to the differences of the person, the entrepreneur and the small business owner/manager, it is valid to say that entrepreneurship is a different way to manage a business. The entrepreneurial venture requires visionary management, in order to
encompass innovation, growth and strategy. A small business manager might be very effective day to day manager, but may lack the ability to position his or her business in the future within a complex and dynamic environment. So, one could identify as ingredients of entrepreneurial management a focus on change, a focus on opportunity, and the ability to manage the business organisation-wide. These differences between entrepreneurs and
administrators are summarised by Stevenson (1999), whose analysis is based
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on six key dimensions: 1. Strategic Orientation: Entrepreneur: I will search for opportunity, and my
fundamental task is to acquire the resources to pursue opportunity. Administrator: I will prune my opportunity tree based on
the resources I control. I will not try to leap far beyond my current situation. 2. Commitment to Opportunity: Entrepreneur: Administrator: Revolution Risk calculation. Evolution Risk aversion.
3. Commitment of Resources: Entrepreneur: Administrator: Do a little more with a little less. Large-scale commitment to resources.
4. Control of Resources: Entrepreneur: Administrator: Using but not owning resources. Acquisition and security of resources.
5. Management Structure: Entrepreneur: Administrator: Self-centred with informal relationships. Formal and structured organization.
6. Reward Philosophy: Entrepreneur: Administrator: Based on creation and harvesting of value. Protection of own position and security.
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Discussion Points: How important are SMEs in your country? Why do most SMEs fail? Is it an acceptable fact or can this be changed? Can you identify an entrepreneurial business and an SME? Can you identify their key differences? How do you understand the concept of growth potential? How do you evaluate yourself? As an Entrepreneur or an Administrator? Why? Which is more important: entrepreneurial behaviour or administrative competence?
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8. Future Challenges for Entrepreneurship Research

Learning Objectives: After having read chapter 1.8 you should be able to: Be aware of the future in entrepreneurship research.
In this initial part of the course material, we have looked into the theory of entrepreneurship as it has developed over the years. We identified a variety of theoretical approaches and discussed the interdisciplinary nature of such a crucial field. Also, we looked into several other aspect of entrepreneurship that have emerged over the years and have attracted the interest of researchers. The only issues that were not dealt with in this part have to do with economic growth through entrepreneurship and the application of entrepreneurship within various types of economic systems. These are included in the next Part.
As the field of entrepreneurship evolves, research is dynamic and evolves along. Entrepreneurship research is an applied scientific process that aims at understanding and explaining. Busenitz et al (2003) reviewed all significant academic output in the field and identified the future challenges of entrepreneurship research. They claim that the boundaries of the field have been set and therefore the time has come for researchers to start combining theories and approaches and attempt to establish an inter-disciplinary research profile. The key elements of such a profile would include research topics that are at the intersections of the following items that have been heavily researched: The business environment Individuals and teams Opportunities Mode of organising
Also, other topics could be combined with the above, such as: Decision-making theories
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Start-up factors of production Information processing Network theory Education and training
Many similar propositions have been made. Therefore, it is clear to see that entrepreneurship as a field has reached maturity and requires at this point more challenging research questions in order to move forward.
The reader might find it interesting to follow the articles and material published in a variety of academic journals and other resources. The key journals on entrepreneurship that are being reviewed by prominent academics are: Journal of Business Venturing. The Journal of Small Business Management. Small Business Economics. Entrepreneurship Research and Development. Entrepreneurship: Theory and Practice. International Small Business Journal. Family Business Review. Creativity and Innovation Management.
Also, other significant academic journals that often publish articles on entrepreneurship are: Academy of Management Journal. Academy of Management Review. Journal of Management Education. Strategic Management Journal.
Moreover, one can find numerous theoretical and applied resources on the Internet. For example, Google offers 23,400,000 results for the word entrepreneurship only. However, one be very careful about the quality of the information available through the Internet. In general, it is advisable not to use material accessed through sites that do not belong to prominent and well
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known institutions, organisations and universities.
Finally, there are many books on entrepreneurship, both academic and practical. Any book will offer insight on the field and widen the horizons of the reader. However, the reader should carefully select where and how to spend his or her budget.
Discussion Points: Formulate one research question in the area of entrepreneurship and describe why this is of importance. How would you research it?
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Part A Bibliography and Further Reading

Amit, R., Glostein, L. and Muller, E. (1993) Challenges to theory development in entrepreneurial research, Journal of Mathematical Sociology, 30, pp. 815-34 Appelbaum, E. and Katz, E. (1986) Measures of risk aversion and comparative statistics of industry equilibrium, American Economic Review, 76, pp. 524-29 Arabsheibani, G., de Meza, D., Maloney, J. and Pearson, B. (2000) And a vision appeared unto them of a great profit: evidence of self-deception among the self-employed, Economic Letters, 67, pp. 35-41 Aronson, R.L. (1991) Self Employment: A Labour Market Perspective, Ithaca, New York, NY, ILR Press Bernardo, A.E. and Welch, I. (2001) On the evolution of over confidence and entrepreneurs, Journal of Economics and Management Strategy, 10, pp. 301-30 Blanchflower, D.G., Oswald, A. and Stitzer, A. (2001) Latent entrepreneurship across nations, European Economic Review, 45, pp. 680-91 Bolton, J.E. (1971) Report of the Committee of Inquiry on Small Firms, Cmnd.4811, London, HMSO Boyd, D.P. (1984) Type A behaviour, financial performance and organisational growth in small business firms, Journal of Occupational Psychology, 57, pp. 137-40 Bruyat, C.A. and Julien P.A. (2001) Defining the field of research in entrepreneurship, Journal of Business Venturing, 16, pp. 165-80 Burns, P. and Dewhurst, J. eds (1996) Small Business and Entrepreneurship, 2nd ed., NY, Palgrave Leonard-Barton, D. (1984) Interpersonal communication patterns among Swedish and Boston area entrepreneurs, Research Policy, 13, pp. 101-14 Busenitz, L.W., West, G.P., Shepherd, D., Nelson, T., Chandler, G.N. and Zacharakis, A. (2003) Entrepreneurship research in emergence: Past trends and future directions, Journal of Management, 29, pp. 285-308 Cantillon, R. (1755) Essai Sur la Nature du Commerce en Gnral, 1931 edn. Ed. and tran. By H. Higgs, London, Macmillan Carter, S. and Jones-Evans, D. eds (2000) Enterprise and Small Business, London, Prentice Hall Casson, M. (1982) The Entrepreneur: An Economic Theory, Oxford, Robertson Cooper, A.C., Woo, C.Y. and Dunkelberg, W.C. (1988) Entrepreneurs perceived chances for success, Journal of Business Venturing, 3, pp. 97108 de Meza, D. and Southey, C. (1996) The borrowers course: optimism, finance and entrepreneurship, Economic Journal, 106, pp. 375-86
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Deakins, D. (1999) Entrepreneurship and Small Firms, 2nd ed., Berkshire, McGraw-Hill Dixit, A. and Rob, R. (1994) Switching costs and sectoral adjustments in general equilibrium with uninsured risk, Journal of Economic Theory, 62, pp. 48-69 Dunn, T. and Holtz-Eakin, D. (2000) Financial capital, human capital and the transition to self-employment: evidence from intergenerational links, Journal of Labour Economics, 18, pp. 282-305 European Commission (2004) SMEs in Europe, Luxembourg, Office for Official Publications of the European Communities European Commission (2004) Flash Eurobarometer; Entrepreneurship, http://ec.europa.eu/public_opinion/flash/fl160_en.pdf (May 20, 2007) Goffee, R. and Scase, R. (1987) Patterns of business proprietorship among women in Britain, in Goffee, R. and Scase, R., eds, Entrepreneurship in Europe, London, Croom Helm Hebert, R.F. and Link, A.N. (1988) The Entrepreneur Mainstream Views and Radical Critiques, 2nd ed., New York, NY, Praeger Kanbur, S.M. (1979) Of risk taking and the personal distribution of income, Journal of Political Economy, 87, pp. 769-97 Kaufmann, P.J. and Dant, R.P. (1998) Franchising and the domain of entrepreneurship research, Journal of Business Venturing, 14, pp. 5-16 Kets de Vries, M.F.R. (1977) The entrepreneurial personality: a person at the crossroads, Journal of Mathematical Sociology, 14, pp.34-57 Kirzner, I. (1973) Competition and Entrepreneurship, Chicago, University of Chicago Press Kirzner, I. (1985) Discovery and the Capitalist Process, Chicago, University of Chicago Press. Knight, F.H. (1921) Risk, Uncertainty and Profit, New York, Houghton-Mifflin Landau, R. (1982) The innovative milieu, in Lundstedt, S.B. and Colglazier, E.W. Jr , eds, Managing Innovation: The Social Dimensions of Creativity, Invention and Technology, New York, NY, Pergamon Press Lucas, R.E. (1978) On the size distribution of business firms, Bell Journal of Economics, 9, pp. 508-23 Manove, M. (2000) Entrepreneurs, optimism and the competitive edge, Boston University, Mimeo McClelland, D.C. (1961) The Achieving Society, Princeton, Van Nostrand McGrath, R.G. and MacMillan, I. (2000) The Entrepreneurial Mindset, Boston, MA, Harvard Business Review Mitchell, J.C. (1973) Networks, norms and institutions, in Boissevain, J. and Mitchell, J. C., eds, Network Analysis: Studies in Human Interaction, London, Mouton and Company Parasuraman, S. and Simmers, C.A. (2001) Type of employment, work-family conflict and well being: a comparative study, Journal of Occupational
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Entrepreneurship courses in Tbilisi State University Part A

Joseph Hassid Alexios-Stefanos Komselis

University of Piraeus May 2007

Entrepreneurship courses in Tbilisi State University Part A

Entrepreneurship courses in Tbilisi State University Part A

University of Piraeus May 2007

Entrepreneurship courses in Tbilisi State University Part A

Professor Joseph Hassid Project Coordinator

University of Piraeus May 2007

Entrepreneurship courses in Tbilisi State University Part A

Introduction to Entrepreneurship Theorising Entrepreneurship

University of Piraeus May 2007

Entrepreneurship courses in Tbilisi State University Part A

Entrepreneurship courses in Tbilisi State University Part A

Entrepreneurship courses in Tbilisi State University Part A

University of Piraeus May 2007

Entrepreneurship courses in Tbilisi State University Part A

Entrepreneurship courses in Tbilisi State University Part A

Entrepreneurship courses in Tbilisi State University Part A

Entrepreneurship courses in Tbilisi State University Part A

University of Piraeus May 2007

Entrepreneurship courses in Tbilisi State University Part A

University of Piraeus May 2007

Entrepreneurship courses in Tbilisi State University Part A

A desire to be effective or challenged. Interpersonal strength.

University of Piraeus May 2007

Entrepreneurship courses in Tbilisi State University Part A

University of Piraeus May 2007

Entrepreneurship courses in Tbilisi State University Part A

Entrepreneurship courses in Tbilisi State University Part A

University of Piraeus May 2007

Entrepreneurship courses in Tbilisi State University Part A

University of Piraeus May 2007

Entrepreneurship courses in Tbilisi State University Part A

Entrepreneurship courses in Tbilisi State University Part A

Entrepreneurship courses in Tbilisi State University Part A

The counterpart of experience, education, appears to have an ambiguous

Entrepreneurship courses in Tbilisi State University Part A

Entrepreneurship courses in Tbilisi State University Part A

Entrepreneurship courses in Tbilisi State University Part A

Entrepreneurship courses in Tbilisi State University Part A

groups offer a significant input to the local and national economy.

University of Piraeus May 2007

Entrepreneurship courses in Tbilisi State University Part A

Entrepreneurship courses in Tbilisi State University Part A

Entrepreneurship courses in Tbilisi State University Part A

University of Piraeus May 2007

Entrepreneurship courses in Tbilisi State University Part A

Entrepreneurship courses in Tbilisi State University Part A

University of Piraeus May 2007

Entrepreneurship courses in Tbilisi State University Part A

University of Piraeus May 2007

Entrepreneurship courses in Tbilisi State University Part A

University of Piraeus May 2007

Entrepreneurship courses in Tbilisi State University Part A

Figure: Landaus Classification of Entrepreneurial Types

University of Piraeus May 2007

Entrepreneurship courses in Tbilisi State University Part A

Figure: Evolution of Employment Choice over Time; EU and USA

Figure: International Variance of Employment Choice

University of Piraeus May 2007

Entrepreneurship courses in Tbilisi State University Part A

Figure: Detailed National Variance of Employment Choice