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Burt F. Hoselitz was a professor of economics at the University of Chicago. Hoselitz argues that entrepreneurship tends to come from socially marginalized groups in a given society. This is very similar to the withdrawal of status respect theory and the misfit theory of entrepreneurship , which both deal with marginalized populations. Hoselitz assumes that entrepreneurship can only come out of a developed cultural base. Marginalized populations must be considered culturally developed in order to be considered eligible for entrepreneurship. He refers to entrepreneurship by marginalized groups as "pariah entrepreneurship". U.S. Coast Guard Photo Hoselitz claimed that his theory helps to explain to the highly entrepreneurial behaviors of Greeks and Jewish people in medieval Europe, Lebanese in West Africa, Chinese in Southeast Asia, and Indians in East Africa. The concept of cultural development is ambiguous and potentially problematic for Hoselitz' theory. The level of de...

Prospect theory was developed by behavioral economists Daniel Kahneman and Amos Tversky in the 1970s. Their aim was to better understand decision making processes by looking at how individuals assess the potential gains and losses from a decision separately. The most famous hypothesis tied to the theory is that most individuals fear losses more than they value gains. The theory posits that when individuals think they are winning (gain domain frame), they become more risk-averse, whereas when they think they are losing (loss domain frame), they become inclined to take bigger risks to get back to a break even position. According to Hsu et al. (2017): "So essentially, whether a person frames a situation as associated with gains or losses influences his or her attitude toward engaging in risky behaviors such as reentering entrepreneurship." A key tenet of the theory is that entrepreneurs judge whether they are in a gain or loss position based on a reference point. For instance...

The word entrepreneur has been traced back to Richard Cantillon , an Irish banker with French roots writing in the early 1700s, before Adam Smith. Cantillon distinguished between entrepreneurs with nonfixed incomes and employees with fixed incomes. Cantillon considered the entrepreneurs as those who undertake to bear and overcome uncertainty by investing, paying expenses and hoping for a return. Cantillon viewed a wide slice of society as entrepreneurial because they bear uncertainty, including: "All the other entrepreneurs, like those who take charge of mines, theaters, buildings, the traders by sea and land, restaurateurs, pastry cooks, innkeepers, etc., as well as the entrepreneurs of their own labor who need no capital to establish themselves, like journeymen artisans, coppersmiths, seamstresses, chimney sweeps, water transporters, live with uncertainty and proportion themselves to their customers. Master craftsmen like shoemakers, tailors, carpenters, wigmakers, etc., who emp...

Scholars have divided entrepreneurship into different categories. For example, self-employed individuals are often not considered entrepreneurs. To be an entrepreneur, there has to be an organization being built. There is even a growing sense that only scalable forms of entrepreneurship should be encouraged (Shane, 2009). Another way to slice up entrepreneurs is to separate between necessity and opportunity entrepreneurs (Harding, 2002). Most entrepreneurship theories focus on opportunity entrepreneurship, but perhaps scholars should also embrace broader views that include entrepreneurship that is based on necessity, or at least consider a greater diversity of entrepreneurship (Welter et al., 2017). This approach looks at the motivations of the entrepreneurs, thus can be considered a motivational theory. Basically, if you have one of the two motives, you are more likely become an entrepreneur. Necessity entrepreneurs are individuals who start businesses because they cannot find a decen...

For some time there has been interest in the question of whether clusters form because of entrepreneurship, or whether clusters benefit entrepreneurs (Delgado, Porter, and Stern, 2010). Clusters refer to geographic concentrations of similar firms, such the technology firms in Silicon Valley. Researchers are interested to know if clusters breed and boost entrepreneurs to see if pro-cluster policies, such as smart parks, make economic sense. Researchers also want to know if entrepreneurs are better off in clusters or not to inform industrial policy around entrepreneurship education and training (Cusmano, Morrison and Pandolfo, 2015). Spinouts: where employees from firms in a cluster leave to start complementary or competing independent ventures, are seen as important to the diversity and competitiveness of clusters. They are especially important because spinouts tend to stay close to their parent firms and their own networks. Thus, where there are many spinouts, there tends to be an clus...

Ludwig M. Lachmann was a German Economist who proposed a radical subjectivist theory of entrepreneurship as an alternative to existing Austrian School theories of entrepreneurship (e.g., altertness theory of entrepreneurship or uncertainty-bearing theory of entrepreneurship or creative destruction theory of entrepreneurship ). According to Lachmann, entrepreneurs develop plans according to their subjective knowledge and expectations. Expectations form as a result of the creative imagination of entrepreneurs, who may envision many competing futures. Entrepreneurs continually revise their plans as they encounter new bits of market information during exchange experiences. Capital is seen as continually recombining due to the process of capital regrouping. As capital is invested sub-optimally, errors lead to new temporary stocks of capital that need to be redeployed toward new purposes. Institutions are viewed as signposts that provide the rules of the game for millions of individuals, a...

Israel Kirzner  is a British-American economist and professor emeritus at New York University. He is associated with the Austrian school of economics. Below, we review Kirzner's alertness theory of entrepreneurship. Kirzner argues that entrepreneurs balance supply and demand by detecting market imperfections and exploiting them. Market imperfections are caused by information asymmetry and bounded rationality. Information asymmetry refers to cases where different stakeholders have varying information about a business venture. Bounded rationality refers to the idea that human are not perfectly rational. According to Kirzner, the profits entrepreneurs receive from entrepreneurship are their reward for their tolerance of uncertainty as they eliminate arbitrage opportunities (the opportunity to sell the same product at a higher price than he or she bought it) created by the ignorance or incompetence of incumbent firms. Entrepreneurs need to be alert in order to be able to perceive ec...

Harvey Leibenstein , American economist, developed X-efficiency theory in the 1960s. He views entrepreneurs as gap-fillers and input complementors. Gaps (X-inefficiency) emerge when there are inefficiencies in markets, such as when incumbents do not utilize their resources efficiently (Leibenstein, 1966;1978) because of political, normative, cognitive, and structural factors. A classic example is the startup without a union that enters a market where all the incumbents have strong unions. The cost advantage of disorganized labor may help firms with low cost business models to thrive at the bottom of the market at margins that are uneconomical for incumbent firms to pursue within the target ranges given to them by their shareholders. If the maximum possible productive use of a resources is greater than the actual use by incumbents , an arbitrage opportunity emerges that an entrepreneur can exploit for profit. Entrepreneurs can also improve inputs by putting to use new resources, thus ma...

Jack of all trades, master of none, still better than a master of one? -- figure of speech The jack of all trades theory of entrepreneurship was proposed by Stanford University economist Edward P. Lazear in a working paper that was eventually published in The American Economic Review in 2004, entitle Balanced Skills and Entrepreneurship . The theory seeks to explain and predict who becomes and entrepreneur, and which entrepreneurs will be successful. According to Lazear, individuals that become entrepreneurs may have more balance in their investment strategy (on average) as compared with individuals that specialize employee roles. Lazear's core idea is that entrepreneurs need to be good at many different things, that is, they are generalists rather than specialists. For instance, when first starting out, a restaurant entrepreneur needs to select vendors for inputs such as food, furniture, equipment, and construction. He or she may also need to be good at marketing (pricing, promot...

 New ventures need to grow at a fast pace to keep up with incumbent firms. Oxenfeld and Kelly (1969) propose resource scarcity theory to explain which some new ventures choose franchising instead of chaining as a means of growth. A core assumption of the theory is that new ventures are founded below minimum efficient scale , such that there is a negative relationship between growth rate and failure of new ventures (Audretsch, 1995). Franchising  is  a quick way to expand a new venture with little upfront capital because the franchisees provide their own capital for their franchises. Since new ventures are often not able to access mainstream financial markets (e.g., for loans, bonds, and equity), franchising is an important alternative. Startups may also be less able to retain earnings to expand, given their commitments to initial investors who may want a quick return (Combs and Ketchen, 1999). Shane (1996) argues that new ventures may also lack the local knowledge needed ...

The knowledge spillover theory suggests that productive innovation comes from both incumbents (established firms) and new entrants (entrepreneurs and their organizations) (Acs et al., 2009; Audretsch & Lehmann, 2005). Knowledge is inherently leaky, and moves through networks and via stakeholder mobility. This is probably a good assumption given that many organizations find it very difficult to keep secrets. Whistleblowers, for example, demonstrate the limits secrecy when they leak information that is damning to their employers. Knowledge spillovers are considered to be the main sources of economic growth and development because they are sources of entrepreneurial opportunities. Entrepreneurship is about making new combinations, but the source of raw material for the combinations have to come from somewhere. Knowledge can leak from organizations in the form of spinouts (employees turned entrepreneurs), or when employees leave to work for other organizations (including direct co...

Transaction cost theory is often attributed to the work of Ronald H. Coase in the 1930s, who used it as a way to explain the existence of organizations. Transaction costs occur whenever an economic exchange happens. Search and information costs describe the work of determining the availability of inputs and identifying the most affordable source of inputs in a market, or finding the best partner for an exchange (Williamson, 1975). Bargaining costs describe the work of negotiating prices and agreements, such as contracts. Solid contracts may require considerable negotiation and the employment of lawyers with skill and experience with contract development. Policing costs describe the efforts needed to enforce agreements or to ensure that exchange terms are being met (Dahlman, 1979). For instance, such costs may be incurred when the legal system is needed to get a partner to do what they promised. Transaction costs add on to normal production costs related to buying inputs to produc...

William J. Baumol was an American economist at New York University. His theory of entrepreneurship starts with the assumption that every society is endowed with their share of entrepreneurs. However, the way in which entrepreneurs use their energies depends upon the institutions—the rules of the game—in place in a given society. He argues that entrepreneurs may engage in productive (i.e., innovation) or unproductive (rent-seeking and crime) forms of entrepreneurship depending on what a country’s institutions encourage. Baumol argues that the notion of a “spirit of entrepreneurship” is useless for policymakers because there is really nothing they can do to improve it. He proposes that by altering the rules of the game, policymakers can actively invigorate productive entrepreneurship in their societies and reduce unproductive or destructive forms of entrepreneurship. Changes to the rules of the game can vary but include changes to tax rules, regulations, subsidies and support programs. ...

Frank Hyneman Knight, an American economist at the University of Chicago, developed the uncertainty-bearing theory in the 1920s to explain the phenomenon of entrepreneurship. The roaring 20s  brought with them renewed attention to the people and processes that served to bring innovations to market with increasing intensity. The uncertainty-bearing theory views entrepreneurs as bearers of uncertainty. Knight distinguished between risk that can be modeled probabilistically , from uncertainty, for which the probabilities are unknowable. For instance, uncertainty surrounds the implementation of new strategies, the development of new products or markets, or the consequences of acquiring a competitor may have unknowable probabilities. According to the theory, bearing business uncertainty creates profit and the more uncertainty taken on, the more profit to be gained. The theory places great emphasis on the entrepreneur’s ability to make decisions under uncertainty . The uncertainly persp...