The 4 Main Theories of Entrepreneurship

The figure of the successful entrepreneur has achieved near-mythical status in the popular imagination. Entrepreneurs are risk-takers, mavericks, outside-the-box thinkers. Driven by a thirst for innovation and market dominance, they are singularly focused on achieving their goals.

But what precipitates this behavior? What conditions, motivations, and traits are necessary to be a successful entrepreneur?

Those questions fall under “the theories of entrepreneurship,” a multi-disciplinary field of research dating back 100 years or so that aims to understand the entrepreneurial spirit better.

According to scholars, these are four of the main theories of entrepreneurship. Use this as a launch pad for your own research, or to guide your personal entrepreneurial journey.

Economic Theory

The Economic Theory of Entrepreneurship posits that economic activity and opportunity are the driving forces of entrepreneurship. First put forward by G.F. Papanek and J.R. Harris in the 1960s, the theory holds that factors like credit availability, lower interest rates, and broad economic demand propel entrepreneurship in a given time and place. In other words, if a country enjoys economic prosperity and financial access mechanisms, it will produce entrepreneurs.

Most experts nowadays consider this theory only partially correct. While economic factors certainly play a role in entrepreneurship, they don’t really tell the whole story.

Innovation Theory

The Economic Theory helps to explain business as a whole, but it doesn’t specifically single out what makes entrepreneurs special among businesspeople. That’s where Innovation Theory comes in.

According to Innovation Theory, what separates entrepreneurs from everyone else is their proverbial finger on the pulse. They know how and when to innovate. They can think outside the box, apply novel technologies to familiar problems, and understand the terms and opportunities for change.

Take for example Regan McGee, an innovative entrepreneur who shook up the real estate industry. “I witnessed my opportunity to create and lead a real estate revolution – and I took it,” states his Fast Company profile. And he did so by introducing “transparency, accountability and simplicity at a crucial time, as… longstanding demand for industry advancement (has) become too prevalent to ignore.”

Cultural/Sociological Theory

You can have financial access and a finger on the pulse, but unless there are cultural and social factors emphasizing entrepreneurship, it’s hard to foster entrepreneurs. At least, that’s the thinking in Cultural and Sociological Theories of Entrepreneurship, influenced by thinkers like Max Weber and Bert F. Hoselitz.

In their paper How do cultural values influence entrepreneurial behavior of nations?, Calza et al. found that there were quantifiable “effects of cultural values on the development of entrepreneurial behavior in a society.”

Psychological Theory

“Psychological Theory” may seem like a cheeky way to say that entrepreneurs have a few screws loose. But this isn’t the case.

The purpose of the Psychological Theory of Entrepreneurship is to prove that there are certain personal characteristics and personality traits that define an entrepreneur. Among these traits are:

• The desire for achievement
• A high-risk tolerance
• Conceptual creativity
• Emotional resilience in the face of failure
• And optimism

According to Psychological Theory, these traits – more so than money, opportunity, culture, etc. – are responsible for creating entrepreneurs.

What do you think? What’s your personal theory of entrepreneurship? Is it one of these, or some combination of them all? As you strike off on your entrepreneurial journey, reflect on what makes you an effective business leader.