Millions new enterprises start each year despite more than a 50% failure rate. Consumers, business people, and government officials take an interest in this activity. This interest is evidenced in the increasing research on the subject, the increased number of courses in entrepreneurship, and the increased coverage by the media.
Starting and managing a new business involves considerable risk and effort to overcome all the inertia against creating something new. In creating and helping a new venture to grow, the entrepreneur has all the responsibility for its development, growth and survival, as well as corresponding risks and rewards.
Who wants to accept all the risks and effort involved in creating a new venture? The person may be a man or a woman, come from an upper-class or a lower-class background, have a college or a university degree or be a high school dropout. The person may have been a student, a teacher, an engineer, a salesperson, a manager, a retired person, etc.
DEVELOPMENT OF ENTREPRENEURSHIP
Who is an entrepreneur? What is entrepreneurship? These frequently asked questions reflect the increased international interest in the field. In spite of all this interest, a concise, universally accepted definition has not yet emerged. The word entrepreneur is French and literally translated, means “between-taker” or “go-between”. Let’s take a look at the entrepreneurship from a historical perspective.
EARLIEST PERIOD
One early example of a go-between is Marco Polo, an Italian, who was one of the first Europeans who sailed to the Far East. He attempted to establish trade routes to China. He signed a money contract with a money person to sell his goods. That money person was a forerunner of today’s capitalist. A common contract during that time provided a loan to the merchant-adventurer at a 22.5 percent rate, including insurance. While the money person was a passive risk taker, the merchant-adventurer took the active role in trading, bearing all the physical and emotional risks. After the successful completion of a journey by the merchant-adventurer, the money person took most of the profits (up to 75 percent), while the entrepreneur merchant settled for the remaining 25 percent.
MIDDLE AGES
In the Middle Ages, the term entrepreneur was used to describe both an organizer of musical performances and a manager of large building projects. In such projects, this person did not take any risks, but merely managed the project using the resources provided. A typical entrepreneur in the Middle Ages was the cleric – the person in charge of great architectural works, such as castles and fortifications, public buildings, abbeys, and cathedrals.
17TH CENTURY
The connection of risk with entrepreneurship developed in the 17th century. At that time an entrepreneur was a person who entered into a contract with the government to perform a service or to supply stipulated products. Since the contract price was fixed, any resulting profits or losses reflected the efforts of the entrepreneurs – the better they worked the more profit they had. One of the entrepreneurs in this period was John Law, a Frenchman, who was the founder of the royal bank of France and the Mississippi Company, which had an exclusive franchise to trade between France and the New World. Unfortunately, this monopoly on French trade led to Law’s downfall when he attempted to push the company’s stock price higher than the value of its assets; this eventually led to the collapse of the company. Richard Cantillon, a well-known English economist at the beginning of the 17th century, understood Law’s mistake. Cantillon developed one of the first entrepreneur definition. He is regarded by some researchers as the founder of the term. He viewed the entrepreneur as a risk taker because merchants, farmers, craftsmen, and other sole proprietors “buy at a certain price and sell at an uncertain price, therefore operating at a risk.”
18TH CENTURY
Finally, in the 18th century, the person with capital was differentiated from the one who needed capital. In other words, the entrepreneur was distinguished from the capital provider (the present-day venture capitalist). One reason for this differentiation was the industrialization occurring throughout the world. Many of the inventions developed during that time were reactions to the changing world, as was the case with Thomas Edison, the author of many inventions. He was developing new technologies and was unable to finance his inventions himself. Edison raised capital from private sources to develop and make experiments in the fields of electricity and chemistry. Edison was a capital user (an entrepreneur), not a provider (a venture capitalist). In contrast, a venture capitalist is a professional money manager who makes risk investments from a pool of equity capital to obtain a high rate of return on the investments.
19TH AND 20TH CENTURIES
In the late 19th and early 20th centuries, entrepreneurs were frequently not distinguished from managers and were viewed mostly from an economic perspective: Briefly stated, the entrepreneur organizes and manages an enterprise for personal gain. He pays current prices for the materials consumed in the business, for the use of the land, for the services he employs, and for the capital he requires. He contributes his own initiative, skill and ingenuity in planning, organizing and administering the enterprise. He also assumes the chance of loss and gain consequent to unforeseen and uncontrollable circumstances. The net residue of the annual receipts of the enterprise after all costs have been paid, he retains for himself.
Andrew Carnegie is one of the best examples of this definition. Carnegie invented nothing. Using new ideas he developed new technology into products to achieve economic results. Carnegie, who descended from a poor Scottish family, made the American steel industry one of the wonders of the industrial world, primarily thanks to his ability to win competition, rather than his inventiveness or creativity.
In the middle of the 20th century, the notion of an entrepreneur as an innovator was established: The function of the entrepreneurs is to recreate or revolutionize the pattern of production by introducing an invention or, more generally, by using new technological possibilities for producing a new commodity or producing an old one in a new way, by opening a new source of supply of materials or a new outlet for products; by reorganizing an old industry and creating a new one...
In this definition the concept of innovation and newness is an integral part of entrepreneurship. Indeed, innovation, the act of introducing some new ideas, is one of the most difficult tasks for the entrepreneur. It needs not only the ability to create, but also the ability to understand all the forces at work in the environment. The newness can consist of anything from a new product to a new organizational structure.
Edward Harriman, who reorganized the railroad in the United States, or John Morgan, who developed his large banking house by reorganizing and financing the nation’s industries, are examples of entrepreneurs fitting this definition.
These organizational innovations are as difficult to develop successfully as the more traditional technological innovations (transistors, computers, lasers) that are usually associated with the word invention.
This ability to innovate is an instinct that distinguishes human beings from animals. The instinct can be observed throughout history, from the Egyptians who designed and built great pyramids out of stone blocks weighing many tons each, to laser beams, supersonic planes and space stations. While the tools have changed with advances in science and technology, the ability to innovate has always been present in every civilization.
ENTREPRENEUR DEFINITION
The exploration of the aspects of entrepreneurship from a business (economic), managerial, and a personal perspective in the 20th century is reflected in the following judgments of an entrepreneur.
In almost all of the definitions of entrepreneurship, there is an agreement that we are talking about a kind of behavior that includes:
(1) initiative taking;
(2) the organizing and reorganizing of social and economic mechanisms to turn resources and situations to practical application;
(3) the acceptance of risk or failure (readiness to risk).
From an economist’s point of view, an entrepreneur is one who brings resources, labor, materials, and other assets into combinations that make their value greater than before, and also one who introduces changes, innovations, and a new order.
From a psychologist’s point of view, an entrepreneur is such a person that is typically driven by certain forces – wish to obtain or attain something in life, to make experiments, or perhaps to escape authority of others (gain independence) . . .
From a capitalist philosopher’s point of view the same person is seen as one who creates wealth for others as well who finds better ways to utilize resources, and reduce waste (loss), and who produces jobs others are glad to get.
To one business person, an entrepreneur may appear as a threat, an aggressive competitor, whereas to another business person the same entrepreneur may be an ally, a source of supply, a customer, or someone good to invest in . . .
While each of these definitions views entrepreneurs from a slightly different perspective, each contains similar notions, such as newness, organizing skill, creating ability, wealth increase, and risk taking. Each definition is somewhat restrictive because entrepreneurs are found in many professions – education, medicine, research, law, architecture, engineering, social work, and distribution. Therefore, to include all types of entrepreneurial behavior, one researcher has proposed the following definition of entrepreneurship: Entrepreneurship is the process of creating something different (new) with value by devoting the necessary time and effort, assuming the accompanying financial, psychic, and social risks, and receiving the resulting rewards of monetary and personal satisfaction and independence.
Just as the concept of entrepreneurship has developed gradually over time as the world’s economic structure has changed and has become more complex, so it will continue to evolve to embrace new realities. As the need to promote entrepreneurship becomes more urgent, so does the need to understand what it is and how it operates in a variety of situations.
GLOSSARY:
enterprises business firms
business a particular money earning activity or place (a store, a company, a firm, etc.)
venture a business in which there is some degree of risk
background a person’s experience and education
dropout a person who drops out of school or college without completing the course.
concise short and clear
literally exactly
forerunner someone that follows
loan the act of lending
merchant a person who buys and sells goods
settled for accepted less than hoped for
cleric a clergyman, a Christian priest
stipulated demanded as a condition
franchise a special right given by a company to a person or group to sell that company’s goods or services in a particular place
stock all the shares
assets smth that has value and that may be sold to pay a debt
equity capital part of the capital that consists of founder’s shares, all of which together carry the right of ownership in the business
net residue profit after tax, rent, etc. are paid
commodity an article of trade or commerce, goods
outlet a place from which goods are sold
Questions for discussion:
1. Why study entrepreneurship?
2. Your idea of what an entrepreneur is? List the strengths and weaknesses (as
appropriate) of the various definitions. Give your own definition.
3. Give some examples of the companies, which have franchises in Russia.
Compiled by Vladimir Pavlov,
The Moscow Institute
of Business Administration