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Thesis Chapter 1 - Entrepreneurship in the American Economy

"Entrepreneurship in the American Economy"



For many decades, American sociologists puzzled over the atavistic persistence of entrepreneurial values and aspirations in the labor force, despite the declining money returns of the entrepreneur role and its dwindling numbers. Given the nation's laissez-faire traditions, it was easy to understand entrepreneurial ambition as a cultural residual of an economically by-gone era. The founder of entrepreneurship research, Max Weber (1958, 1978), claimed that Puritan theology had once encouraged believers to adopt the entrepreneur's role and to redefine the role's content. As a result, Weber claimed, European capitalism received a stimulus that enabled it to break away from guild traditionalism, a restraint that frustrated capitalism elsewhere in the world. Weber identified a causally significant entrepreneurship because he linked theology, a non-economic determinant, to the supply of entrepreneurs.

Like Alfred Marshall, his contemporary, Weber believed that large bureaucratic organizations were the model of the future (Aronson, 1991:117; Hage and Powers, 1992). This view was anti-entrepreneurial in implication because big organizations need few entrepreneurs. Secondly, Weber (1958:181-183; 1:368) supposed that "victorious capitalism" of the twentieth century no longer needed the support of "religious asceticism." To the extent that entrepreneurs were still needed, Weber implied that mature capitalism relied upon market signals to produce the needed entrepreneurs from a population securely attached to materialistic ideals. As a result, the market could take over from society the job of supplying its own entrepreneurs.

Implicit in Weber's vision is the presumption that mature capitalism had molded a labor force in whom entrepreneurship had been culturally legitimated and enshrined. In the shadow of this cultural change, entrepreneurship became a fungible, elastic, and inexhaustible labor commodity. Therefore, entrepreneurship had lost its historic connection to non-economic sources of supply and therewith its causal significance.

Schumpeter (1934, 1988) distinguished entrepreneurship from economic innovation, treating entrepreneurship as just one method by which economic innovation could occur. Schumpeter also supposed that large, professionally managed, corporately organized business firms would continue to replace small owner-operated firms as the dominant industrial combination in advanced market societies (Cauthorn, 1989:18-21, 58-59). However, giant corporations' management would assume entrepreneurship's duties. That is, professional managers would take over the entrepreneur's task of planning innovation, evaluating its risks, and executing the plans.

On the opposite side of the pole, and uninterested in entrepreneurship, Karl Marx was most interested in the bourgeoisie, and in an unusual demonstration of political convergence, his pessimistic evaluation of its future agreed with the conclusions of the conservative Schumpeter and of Weber, the liberal. Marx (1965: Ch. 32) analyzed the "historical tendency of capitalist accumulation" in terms of progressive reduction of small capital on the one hand, and of proportional and absolute growth of big capital on the other. Marx (1965:763) expected this progressive reduction would be "accomplished by the - immanent laws of capitalistic production itself, by the centralization of capital." That is, overlooking their political influence, Marx supposed that big firms had preponderant economic strength arising from market power, economies of scale, and access to capital such that big firms vanquished and absorbed smaller competitors. When small firms disappeared, entrepreneurs would disappear too because small firms provided the vehicle for entrepreneurs. Marx's prediction proved remarkably successful. Small business declined, and big business increased as he had anticipated.

As all these classical expectations materialized to a significant extent, economists and social scientists lost interest in entrepreneurship research, deeming the subject of interest only to historical sociology or Third World and development research (Corley, 1993:12-14). "In the early 1970s there were sound grounds for concluding," writes Boissevain (1984) "that the decline of the small enterprises was a universal and continuing process." However, in the 1980s, the classical view of entrepreneurship came under broad criticism after long decades of unquestioned acceptance. Disputing the classic prescriptions, these writers claimed that entrepreneurship and small business remained too important to ignore and was likely to remain so for the foreseeable future (Borjas, 1986:486; Waldinger, 1986:249; Weiss, 1988:4).

The term “entrepreneur” virtually disappeared in the 1950s, only to be revived by Chandler and Redlich (1964) and psychologists McClelland (1967) and Collins, Moore, and Unwalla (1964). The revival of the search for the elusive entrepreneur did not go unnoticed. The literature suggests that entrepreneurial activity cannot be described using only one dimension. Instead, entrepreneurship is best understood as residing within a conceptual space bounded by three dimensions (Hornaday, 1992): Economic innovation; Organization creation and; Profit-seeking in the market sector.

Entrepreneurship is a special type of innovation. It is innovation aimed at creating economic value. Organization Creation refers to the method of achieving economic innovation; creating economic value. The emphasis here is on the act of creation of a new organization designed to create economic value. The crucial determinant is not size, but the notion that the economic innovation will be carried out by an organization, not an individual (Hornaday, 1992). Taken together, these three dimensions of entrepreneurship overlap to form a conceptual space that differentiates entrepreneurship from other activities (Hornaday, 1992).

The most significant entrepreneurs make frequent, original, and important innovations (Light and Rosenstein, 1995). These are the elite entrepreneurs. People like Henry Ford or Thomas Edison merit this designation. At the opposite extreme, one identifies a huge non-elite whose innovations are derivative, infrequent, and inconsequential but who are, nonetheless, innovators in at least some minimal sense. Almost all entrepreneurs belong to the undistinguished multitude. Indeed, undistinguished entrepreneurs are a surprisingly numerous part of the total work force.

In 1989, approximately one-quarter of the American labor force either was currently self-employed or had been self-employed in the past (Steinmetz and Wright, 1989:974).  Many employees were former entrepreneurs who had failed in business. In contrast, according to Drucker (1985:27-28) a real entrepreneur "always searches for change; responds to it, and exploits it as an opportunity." The obvious objection is that the increased popularity of eating out is a bona fide change that justifies an entrepreneurial response. Therefore, a restaurant owner qualifies as an entrepreneur.

Additionally, innovation is harder to measure than is realized. In an illustrative effort to measure it, Marsh and Mannari (1986) studied 50 manufacturing plants in southwest Japan. They measured entrepreneurship by the owner's plans for expansion and patent applications, finding that some firms were non-entrepreneurial as thus defined. However, Marsh and Mannari's measure of entrepreneurship tapped only quantitative and technological innovation, the latter but one aspect of product innovation. Marsh and Mannari ignored qualitative innovation, factor innovation, and market innovation, which Wilken (1979:62) regards as equally important forms of entrepreneurship. They made no effort to measure these forms of entrepreneurial innovation. Possibly some of the "non-entrepreneurial" firms were innovating in the ignored dimensions. That result could happen if an owner had no plans for expansion, but proposed introducing new technologies, tapping new markets, or introducing new accounting methods. Therefore, when Marsh and Mannari (1986) declared some firms "non-innovating," they did so without having examined all possible dimensions of innovation.

Traditional entrepreneurship's elitism yields a great man theory of economic history as bankrupt as the great man theory of political history. The important differences between rich and poor entrepreneurs and between big innovators and small innovators merit attention (Aldrich and Weiss, 1981). The important differences between rich and poor entrepreneurs usually reflect the level at which each entered the business system rather than each one's innovation or business acumen.

In many cases, major innovations have been the product of an entrepreneurial movement whose members were individually unknown. For example, of the major business changes that have influenced the United States in this century, one of the most prominent has been the growth of fast food restaurants, frozen foods, and take-out foods (Morgan and Goungetas, 1986:92). All these retail industries have responded to the need of American households to reduce the time spent in meal preparation, but other entrepreneurial solutions to this problem (boarding houses, apartment hotels) were business failures (Cowan, 1983). Naturally, some famous entrepreneurs stand out. Founder of Kentucky Fried Chicken, Inc., Harlan Sanders is an identifiable participant in the movement, as is Ray Kroc of McDonald's. But neither Sanders nor Kroc started fast food.  Their celebrity entrepreneurship joined a process that a multitude of unsung entrepreneurs had initiated before them and continued after them.

Advanced market societies award entrepreneurs public approval and esteem, no nation exceeds the United States in public esteem for entrepreneurs. Yet, even in the United States, the public still despises some entrepreneurs.

While much has been written about the need for established firms to become more entrepreneurial (Brandt, 1986; Waterman, 1987), only limited progress has been made in determining exactly how entrepreneurship can be accomplished and sustained in these organizations (Jennings and Young 1990; Morris and Trotter 1990). Attempts to address this issue appear to emphasize the differences (Allen, Davis, and Morris, 1994), rather than the similarities between independent start-ups and established firms (MacMillan 1983; Miller and Friesen, 1983). The assumption seems to be that entrepreneurship in a corporate setting is a relatively unique phenomenon (Cornwall and Perlman, 1990).

This paper proposes that entrepreneurs independently affect the rate, form, and location of economic development. That is, the quality and abundance of the entrepreneurs available are important causes of economic growth and development. As Granovetter (1990:105) has stressed, one must reject the assumption that "entrepreneurial activity is somehow automatically called forth by economic circumstances." Instead, the sociology of entrepreneurship posits markets that depend for entrepreneurs upon exogenous and non-economic societal conditions. The null hypothesis proclaims that entrepreneurship is predictable and economic in origin.

Conceptual Framework

This study shall utilize the fuzzy set approach developed by Hornaday (1992). The fuzzy set approach limits entrepreneurship to activities that have involvement on three dimensions (Hornaday, 1992). There are both scholarly and practical uses for this concept. Theoretical and empirical research efforts often attempt to classify firms as entrepreneurial or not entrepreneurial; or more entrepreneurial as opposed to less entrepreneurial. Since there is no accepted description of entrepreneurship, scholars use a mélange of surrogate measures for entrepreneurship such as size, newness, personality traits of the owners, rates of growth, and rates of adoption of new technology, to name just a few. Use of a fuzzy set bounded by three entrepreneurial dimensions will allow scholars to better describe and justify their classifications: Economic Innovation, Organization Creation and Profit-Seeking in the Market Sector.

The fuzzy set approach to thinking about entrepreneurship offers two major paradigm changes. First, it moves away from the dichotomous "either, or" view of entrepreneurship in favor of a more flexible "more or less" approach. Activities do not have to meet a rigidly defined acid test to be considered entrepreneurial. Secondly, the use of three dimensions provides a rich and relatively complex concept of entrepreneurship while establishing reasonable boundaries not present in unlimited functional visions of entrepreneurship.

Statement of the Problem

Although entrepreneurs have political and cultural significance, and these are important aspects of the role, this study addresses the economic significance of entrepreneurs. The economic significance of entrepreneurs resides in their independent contribution to the economic development and growth of their region and of their own country (Knight, 1921:283).

This study investigates the factors affecting entrepreneurship in the United States and its subsequent effects in the American economy.

            Specifically, the following questions were answered:

1.    What are the factors affecting the success or failure, and the number of entrepreneurs in the United States?

2.    What are the developments in the entrepreneurial activities and its subsequent effects in the progress of the American economy?

3.    At present, what are the effects of entrepreneurship in employment, economic growth and the recovery of the American economy from economic stagnation?

4.    How effective is entrepreneurship in the pursuit of economic growth and stability by the American economy?


            This study tests the following null hypothesis:

1.    There is a positive correlation between entrepreneurship and the economy

2.    Entrepreneurship significantly affects the American Economy


Significance of the Study

            This study determines the factors affecting entrepreneurship in the United States and its subsequent effects in the American economy. It looks into the factors affecting the rise or decline of entrepreneurship and its effect in the employment rate and the economic growth of the country. Specifically, the new trends in entrepreneurship are illustrated with subsequent references to the economic stability goals by the country. Entrepreneurs, the American economic strategists and analysts, students, the academe and the business sector should gain insights on the significance of entrepreneurship and its advantages and disadvantages. This would allow them to rethink their policies and practices based on the findings of this study.

Scope and Limitation

            This study discusses the effects of entrepreneurship in the American economy. The discussion outlines the different factors affecting the success or failure of entrepreneurship and its concurrent hold on the economy.  Moreover, it  includes cultural variables such as culture and the nature of the American economy as factors affecting the persistence of entrepreneurships.  As such, countries may differ on this aspect and the analysis may not be applicable to other countries. Furthermore, the respondents of the study were limited to entrepreneurs and economic analysts.


Definition of Terms:

Capital - is money which must be invested in a company in order to enable it to carry out its activities

Entrepreneur - is a person who organizes resources to create a venture which satisfies needs

Entrepreneurship - is a creative process in which opportunities are perceived and resources mobilized in order to bring about change in new and innovative ways to achieve some benefit

Intrapreneurship - is a type of entrepreneurship which is found within a large corporation

Laissez-Faire - is a type of economic system which ignores the task or job specifics and who leaves employees free to decide what they will do and how they will do it

            Market-Pulled Entrepreneurship - is a type of entrepreneurship which first identifies a problem or unsatisfied need and then develops an idea to resolve the problem or satisfy the need

            New Wave Entrepreneur - is a type of entrepreneur who looks for opportunities by carefully plotting trends or changes as we continue to move from the Industrial Age into the Information Age

            Product Driven Entrepreneurship - is a type of entrepreneurship which first develops an idea for a product or service, and then seeks out a marketing opportunity










































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