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There are three main schools of thought for the theory of
entrepreneurship which are all based on different themes. The French school of
thought focuses on the theme of uncertainty and to a certain extent risk. The
Austrian school of thought which was developed from the French school of
thought centres around equilibrium and having profit as a motive. The German-
Austrian school of thought led by the economist Joseph Schumpeter emphasizes
innovation as key to entrepreneurship; a lot of his research also sees how
entrepreneurship and innovation have helped economic development.

 

One view of entrepreneurship is the French school of thought which
has the theme of uncertainty. The term uncertainty refers to a condition where
you are not sure about the future outcomes. Richard Cantillon was the first to
use entrepreneurship as a term and his theory is that entrepreneurs function by
bearing risk under uncertainty (Mises Institute, n.d.). In order for
entrepreneurs to increase profit, they have to grow their business which
includes taking on more risk and uncertainty. This involves the hiring of new
employees, new investments and purchasing more capital, therefore showing that
entrepreneurs need to take on risk, which agrees with Cantillon. Frank Knight
distinguishes between the terms ‘risk’ and ‘uncertainty’; risk is associated
with the randomness of the knowledge probabilities and uncertainty is associated
with the randomness with unknowable probabilities (Shodhganga,
n.d.).
Jean Baptiste Say was another French economist who built on Cantillon’s work,
he believed uncertainty management required more than just foresight, it
required resources. His definition of entrepreneurship is, “Entrepreneurship is
the process of using resources intelligently
to better manage uncertainty thereby unites all factors of production
(resources)”. He said: “The entrepreneur
shifts economic resources out of an area of lower and into an area of higher
productivity and greater yield” (The Economist, 2009). Say differs from Cantillon as he believes
that the entrepreneur manages uncertainty through the coordination of resources
whereas Cantillon mainly focused his work on how entrepreneurs take on the
financial and personal risk involved in creating a business. The French
school greatly disagrees with the view in the question as its main emphasis is that
uncertainty is central to entrepreneurship not innovation; a key point about
the French school is due diligence. Say characterises entrepreneurs in 5 ways;
drivers of uncertainty, uncertainty management, resource combination and
coordination, rigid attention to order and economy and finally the art of
administration and superintendence. The French school of entrepreneurship focuses
predominantly on uncertainty and resources, it has been developed further by
different economists but was first introduced in 1755 so could be considered
out dated as technological changes weren’t important, so even though the French
school disagrees with innovation is central to entrepreneurship’, uncertainty
may have been central to entrepreneurship in the 1800s but in the 21st
century it is not the case.

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The Austrian school which was developed from the French school
says that entrepreneurs have an alertness capability enabling them to recognise
opportunities others miss. The Austrian school focuses on the theme of
equilibrium. If an economy is out of equilibrium there are exploitable gains to
be made from trade, an entrepreneur is someone who takes advantage of the
disequilibrium in the economy by making profitable trades, therefore moving the
economy back into equilibrium. This school of thought does encompass some
acknowledgement of the role that innovation plays in entrepreneurial discovery.
The prospect of profit encourages entrepreneurs to seek innovative ideas to
correct the disequilibrium in the market. “For the entrepreneur who recognises
the opportunity, today’s imperfections represent tomorrow’s profit” (Library of
economics and liberty, n.d.). Although the
Austrian school’s main emphasis is on returning to equilibrium, they do
incorporate the role that innovation plays in entrepreneurship which provides
evidence for the view in the question in which innovation is central to
entrepreneurship. An example of such an entrepreneur is someone who recognises
that an increase in university students creates an increased market for the
renovation of rental homes, thus the entrepreneur is noticing previously missed
profit opportunities and moving the economy back to equilibrium and the supply
is meeting the demand (Sobel, n.d.).
Another strand of Kirzner’s theory of entrepreneurship is alertness, which
links in with the focus on profit. With this he meant that entrepreneurs had an
alertness to the disequilibrium in the market and therefore see a profit
opportunity; this is largely based on the free market model as entrepreneurs
have profit as a motive. Kirzner developed the concept of entrepreneurial
discovery in which in this context means that a person processes information in
a different way to the general public. There are two types of discovery that
Kirzner explores, ordinary and extraordinary. Ordinary discovery refers to a
‘backward’ analysis in which the entrepreneur sees an already existing
situation with a profit opportunity and finds a way to make it better.
Extraordinary discovery refers to a ‘forward’ analysis in which the
entrepreneur sees a profit opportunity by doing something drastically different
and could end up changing the economy (Yu, 1999). In summary of the
Austrian school of thought, there are many different focuses on what drives
entrepreneurship but they are all linked with each other. The entrepreneur has
an alertness to the disequilibrium’s in the market and sees a profit
opportunity in moving the market back to equilibrium, in order to do so the
entrepreneur needs to seek innovative ideas either by ordinary discovery or
extraordinary discovery. Therefore, although there is some emphasis on
innovation playing a role in entrepreneurship it is not the central theme in
this school of thought. 

 

The final theme of entrepreneurship is innovation which is the
focus of the German- Austrian school and was mainly led by Schumpeter. In the
Schumpeterian view, the entrepreneur is a disruptive force in the economy,
which differs from Kirzner’s view as he focused on the entrepreneur’s discovery (Sobel, n.d.). Schumpeter stressed
the process of creative destruction which may be why it is viewed that the
entrepreneur is a disruptive force in the economy. Creative destruction means
the innovation process which new products replace outdated ones (Economics.mit.edu, n.d.). Entrepreneurs can
be seen to be destructive in the economy as their new innovative ideas can
often put others out of business as their products replace old ones, and can
even potentially distort whole markets. For example, the introduction of hybrid
cars which will eventually replace petrol and diesel cars, even though electric
cars are better for the environment and are a step in the right direction, the
introduction of them into the market harms the market for petrol and diesel
cars. The process of creative destruction can be seen as a cause of economic development
as Schumpeter describes how the “innovating entrepreneur challenges incumbent
firms by introducing new inventions” (Carree & Thurik, n.d.). In this school of
thought, firms are seen as a combination of resources and knowledge, new
knowledge creates scope for innovation. Firms then experiment with resources in
order to create new combinations and so innovation. Schumpeter points out that
not everyone can make these new combinations and so entrepreneurs are unique. He
did not view entrepreneurs as risk-takers like Cantillon, although he did
acknowledge that innovation contains some elements of risk for the entrepreneur,
he also noted that the entrepreneur’s role is distinctly separate from the role
of inventors. He saw that big businesses often did better than small businesses
as they are able to invest in research and development for their new
innovations. However, he feared that big businesses replacing small businesses
would “negatively influence entrepreneurial values, innovation and
technological change” (Braunerhjelm, 2010). Schumpeterian’s
have distinguished between two different types of entrepreneur, the
‘replicative’ entrepreneur who sets up small businesses, and the ‘innovative’
entrepreneur who engage in the process of creative destruction (The Economist, 2014). Schumpeter’s theory
therefore suggests that innovation is central to entrepreneurship, however he
is careful to note the differences between the innovation and invention,
furthermore he acknowledges that big businesses are more likely to succeed with
innovative ideas because they have the funds to invest in the R.

 

In terms of economic development, entrepreneurship has played a
great role in Saudi Arabia. They have created a programme called the
entrepreneur development programme which allows young adults to reach their
full potential, this is a fairly new scheme as it was not around a decade ago.
In Saudi Arabia, entrepreneurship has increased the production of goods and
services as it is through entrepreneurial activity that the major factors of
production are brought together. The unemployment rate in Saudi Arabia has
fallen since 2012, the ministry of labour says that this is due to the growth
of small and medium sized enterprises, these create 35,000 job opportunities
annually (Yusuf, 2016).
The ministry of labour supports young entrepreneurs and in doing so have
resulted in a re-distribution of wealth and resources as previously the
majority of the wealth in the country had been concentrated to the few, but
with the start-up of new businesses there has been some sort of economic
balance. However, a shortcoming of entrepreneurial activity in Saudi Arabia is
environmental degradation. The main export is petroleum which many
entrepreneurs have invested in production, the over- exploitation of this
non-renewable resource leads to the destruction of the environment and also
puts the future economy in jeopardy as this resource will run out one day.
Saudi Arabia has definitely benefitted from entrepreneurial activity as it has
improved the wealth allocation of their country, lifting people out of poverty
and giving more people an opportunity, however, the focus on petroleum is not
good as a long-term plan.

 

In conclusion, there is no one central theme to entrepreneurship
but rather many which are linked in together and build upon each other. Innovation
is essential to entrepreneurship as the definition of innovation is coming up
with a new method, idea or product and without that you wouldn’t have
entrepreneurship. However, different economist define an entrepreneur
differently, for example, Say characterises an entrepreneur as drivers of
uncertainty, whilst, Schumpeter placed more emphasis on creative destruction
rather than innovation as what defines an entrepreneur. Finally,
entrepreneurship has greatly helped economic development in many countries but
the focus on Saudi Arabia is because of the re-allocation of wealth which has greatly
improved living standards in the country which is down to entrepreneurial
activity. 

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