ENTREPRENEURSHIP

MODULE IN TMHM 8 In
Tourism and
Hospitality
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CHAPTER 1
INTRODUCTION TO
ENTREPRENEURSHIP

Learning Outcomes:
At the end of this chapter, the student will be able to:
 Understand the meaning of entrepreneurship
 Identify various people and their definition of entrepreneurship
 Compare and contrast various views of people regarding entrepreneurship

Learning Activity 1
Qualities of an Entrepreneur
An entrepreneur is a person who sets up a business. They sometimes need to take financial risks to
make a profit. What type of person do you think would be successful as an entrepreneur? Label the
outline below, thinking about the skills and qualities an entrepreneur would need.

NATURE AND DEVELOPMENT OF

ENTREPRENEURSHIP
Who is an entrepreneur? What is entrepreneurship? What is an entrepreneurial career path? These frequently
asked questions reflect the increased national and international interest in entrepreneurship by individuals,
university professors and students, and government officials, in spite of all this interest, a concise, universally
accepted definitions have not yet emerged. The development of the theory of entrepreneurship parallels to a
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great extent the development of the term itself. The word entrepreneur is French and, literally translated,
means “Between-taker’’ or “go-between’’.

Earliest Period
An early example of the definition of an entrepreneur as a go-between is Marco Polo, who attempted to
established trade routes to the Far East. As a go-between, Marco Polo would sign a contract with a money
person to sell his goods. A common contract during this time provided a loan to the merchant-adventurer at a
22.5 percent rate, including insurance. While the capitalist was a passive risk bearer, the merchant-adventurer
took the active role in trading, bearing all the physical and emotional risks. When the merchant-adventurer
successfully sold the goods and completed the trip, the profits were divided with the capitalist taking most of
them (up to 75%), while the merchant- adventurer settled for the remaining 25%.

Middle Ages
In the Middle Ages, the term entrepreneur was used to describe both an actor and a person who managed large
production projects. In such large production projects, this individual did not take any risks, but merely
managed the project using the resources provided, usually by the government of the country. 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 reemergent connection of risk with entrepreneurship developed in the 17th century, with an entrepreneur
being a person who entered into a contractual arrangement with the government to perform a service or to
supply stipulated products. Since the contract price was fixed, any resulting profits or losses were the
entrepreneurs. One entrepreneur in this period was John Law, a Frenchman, who was allowed to establish a
royal bank. The bank eventually evolved into an exclusive franchise to form a trading company in the New
World- the Mississippi Company. 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, leading to the collapse of
the company.

18th Century
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. One reason for this differentiation was
the industrialization occurring throughout the world, as was the case with the inventions of Eli Whitney and
Thomas Edison. Both Whitney and Edison were developing new technologies and were unable to finance
their inventions themselves. Whereas Whitney financed his cotton gin with expropriated British crown
property, Edison raised capital from private sources to develop and experiment in the fields of electricity and
chemistry. Both Edison and Whitney were capital users (entrepreneurs), not providers (venture capitalist). A
venture capitalist is a professional money manager who makes risk investments from a pool of equity capital
obtain a high rate of return on the investments.
19th and 2oth 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 operates an enterprise for personal gain. He pays current prices
for the materials consumed in the business, for the use of the land, for the personal services he employs, and
for the capital he requires. He contributes his own initiative, skill, and ingenuity in planning, organizing and
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administering the enterprise. He also assumes the chance of loss and gain consequence 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.

DEFINITION OF ENTREPRENEUR TODAY

In almost all of the definitions of entrepreneurship, there is agreement that we are talking
about a kind of behavior that includes: 1) initiative taking, (2) organizing and reorganizing of social and
economic mechanism to turn resources and situations to practical account, (3) acceptance of risk or failure.

Entrepreneurship is the dynamic process of creating incremental wealth. The wealth is created by
individuals who assume the major risk in terms of equity, time, and /or career commitment or provide value
for some products or service. The product or service. The product or service may or may not be new or
unique, but value must somehow be infused by the entrepreneur by receiving and locating the necessary skills
and resources.

Entrepreneurship is the process of creating something new with value by devoting the necessary time and
effort.

Entrepreneurship according to Cantillon

The term entrepreneur, which most people recognize means as some who organizes and assumes the risk of a
business in return for the profits, appears to have been introduced by Richard Cantillon (1697-1734), an Irish
economist of French descent. The term came into much wider use after John Stuart Mill popularized it in his
1848 classic, Principles of Political Economy, but then all but
disappeared from the economics literature by the end of the nineteenth
century.

According to Cantillon’s original formulation, the entrepreneur is a

specialist in taking on risk. He “insures”” workers by buying their
products (or their labor services) for resale before consumers have
indicated how much they are willing to pay for them. The workers
receive an assured income (in the short run, at least), while the
entrepreneur bears the risk caused by price fluctuations in consumer
markets. To illustrate, a room attendant or a waiter of a hotel gets paid by
the “entrepreneur” in exchange for the services rendered. However, the
“entrepreneur” bears the risk. The risk would be if nobody would like to
stay the hotel or people do not want to dine out in the restaurant.

Entrepreneurship According to Frank H. Knight

The idea of Cantillon was further refined by the U.S. economist Frank H. Knight (1885-1972), who
distinguished between risk, which is insurable, and uncertainty, which is not. Risk relates to recurring events
whose relative frequency is known from past experience, while uncertainty relates to unique events whose
probability can only be subjectively estimated. In a case of a restaurant owner, the risk is whether people
would like to eat in that restaurant thus making a profit.

Changes affecting the marketing of consumer products generally fell in the uncertainty
category. Individual tastes, for example, are affected by group culture, which in turn,
depends on fashion trends that are essentially unique. Insurance companies exploit the
law of large numbers to reduce the overall burden of risks by “pooling” them.
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Knight observed that while the entrepreneur can “lay off” risks much like insurance companies do, he is left to
bear the uncertainties himself. He is content to do this because his profit compensates him for the
psychological cost involved.

For Knight (1967) and Peter Drucker (1970) entrepreneurship is about taking risk. The behavior of the
entrepreneur reflects a kind of person willing to put his or her career and financial security on the line and take
risk in the name of an idea, spending much time as well as capital on an uncertain venture. Knight classified
three types of uncertainty.

 Risk, which is measurable statistically (such as the probability of drawing a red color ball from a jar
containing 5 red balls and 5 white ball).

 Ambiguity, which is hard to measure statistically (such as the probability of drawing a red ball form a
jar containing 5 red balls but with an unknown number of white balls).

 True Uncertainty or Knightian Uncertainty, which is impossible to estimate or predict statistically

(such as the probability of drawing a red ball from a jar whose number or red balls is unknown as well
as the number of colored balls).

Entrepreneurship according to Joseph A. Schumpeter

Joseph A. Schumpeter （1883-1950）took a different approach,

emphasizing the role of innovation. According to Schumpeter, the
entrepreneur is someone who carries out “new combinations” by such things
as introducing new products or processes, identifying new export markets or
sources of supply, or creating new types of organization Schumpeter
presented a heroic vision of the entrepreneur as someone motivated by the
“dream and the will to found a private kingdom”; the “ will to conquer: the
impulse to fight, to prove oneself superior to others”; and the “joy of
creating”,

In Schumpeter’s view the entrepreneur leads the way in creating new industries, which in turn, precipitate
major structural changes in the economy. Old industries are rendered absolute by a process of “creative
destructions”. As the new industries compete with established ones for labor, materials, and investment goods,
they drive up the price of these resources. The old industries cannot pass on their higher cost because demand
is switching to new products. As the old industries decline, the new ones expand because imitators, with
optimistic profit expectations based on the innovator’s initial success continue to invest.

Schumpeter was concerned with “high-level” kind of entrepreneurship that, historically, has led to the creation
of railroads, the birth of the chemical industry, the commercial exploitation of colonies, and the emergence of
the multidivisional firm. His analysis left little room for the much more common, but not less important “low-
level” entrepreneurship carried by small firms.

Entrepreneurship according to Hayek and Kirzner.

The essence of this low-level activity can be explained by the Austrian approach of Hayek and
Kirzner. In a market economy, price information is provided by entrepreneurs. While bureaucrats in
a socialist economy have no incentive to discover prices for themselves entrepreneurs in a market
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economy are motivated to do so by profit opportunities. Entrepreneurs provide price quotations to

others as an invitation to trade with them. They hope to make a profit by buying cheap and selling it.
In the long run, competition between entrepreneurs arbitrages away price differentials, but in the
short run such differentials once discovered generate a profit for arbitrageur,

ISRAEL M. KIRZNER
FRIEDRICH A. HAYEK

Note: Frank H. Knight maintained that no owner would ever delegate a key decision to a salaried subordinate,
because he implicitly assumed that subordinates cannot be trusted. Uncertainty bearing, therefore, is
inextricably vested in the owners of the firm’s equity, according to Knight. But in practice subordinate can
win a reputation for being good stewards, and even thought salaried, they have incentives to establish and
maintain such reputations because their promotion prospects depend upon it. In this sense, both owners and
managers can be entrepreneurs.

The title of entrepreneur should, however, be confirmed to an owner or manager who exhibits the key trait of
entrepreneurship noted above: judgment in decisions making. Judgment is a capacity for making a successful
decision when no obviously correct model or decision rule is available or when relevant data is unreliable or
incomplete.

Cantillon’s entrepreneur needs judgement to speculate on future price movements, while Knight’s
entrepreneur requires judgment because he deals in situations that are unprecedented and unique.
Schumpeter’s entrepreneur needs judgement to deal with the novel situations connected with innovation.

The insights of previous economists can be synthesized. Entrepreneurs are specialist who use judgment to deal
with novel and complex problems. Sometimes they own the resources to which the problems are related, and
sometimes they are stewards employed by the owners. In times of major political, social and environmental
change, the number of problems requiring judgement increases and the demand for entrepreneurs rises as a
result. For supply to match demand, more people have to forgo other careers in order to become
entrepreneurs. They are encouraged to do so by the higher expected pecuniary rewards associated with
entrepreneurship, and perhaps also by increases in the social status of entrepreneurs, as happened in the
eighties.
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Learning Activity 2

One way to determine whether you have what it takes to be an entrepreneur is to fill out the Questionnaire.

Note: Regardless of your score, keep in mind that the Quiz is not scientifically validated indicator of an
entrepreneur.

Name: ___________________________________ Time and Date: ___________________

I. Multiple Choice.

1. An entrepreneur is commonly the _____ child in the family.

a. oldest c. youngest
b. middle d. doesn’t matter

2. An entrepreneur is most commonly:

a. married c. widowed
b. single d. divorced

3. An entrepreneur is most typically a:

a. man c. either
b. woman

4. An individual usually begins his or her significant entrepreneurial business enterprise at what age?

a. teens d. forties
b. twenties e. fifties
c. thirties

5. Usually an individual’s entrepreneurial tendency first appears evident in his or her:

a. teens d. forties
b. twenties e. fifties
c. thirties

6. An entrepreneur’s primary motivation for starting a business is:

a. to make money [Link] create job security

b. to be independent e. to be powerful
c. to be famous

7. To be successful in an entrepreneurial venture, you need:

a. money d. a good idea

b. luck e. all of the above
c. hard work

8. Entrepreneurs are:

a. high risk takers c. small risk takers

b. moderate risk takers d. doesn’t matter
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9. Entrepreneurs tend to “fall in love’’ with:

a. new ideas c. new financial plans

b. new employees e. all of the above
c. new manufacturing ideas

10. Entrepreneurs are best as:

a. managers c. planners
b. venture capitalist d. doers

Chapter Quiz

Name: _________________________________________________ Time: ________________

I. IDENTIFICATION. Identify what is being asked by the following statements.

1. An early example of the definition of an entrepreneur as a go-between.

[Link] raised capital from private sources to develop and experiment in the fields of electricity and chemistry.

3. A professional money manager who makes risk investments from a pool of equity capital obtain a high rate
of return on the investments.
4. An Irish economist of French descent.
5. Friedrich A. Hayek and Israel M. Kirzner explained about this kind of activity.
[Link] person who said that the entrepreneur is someone who carries out new combinations.
[Link] U.S economist who distinguished between risk and uncertainty.
[Link] is the dynamic process of creating incremental wealth.
9. He was concerned with the “high-level” kind of entrepreneurship.
[Link] maintained that no owner would ever delegate a key decision to a salaried subordinate, because he
implicitly assumed that subordinate cannot be trusted.
[Link] to his original formulation, the entrepreneurship is a specialist in taking on risk.
[Link] to him changes affecting the marketing of consumer products generally fall in the uncertainty
category.
13. In what era the term entrepreneur was used to describe both an actor and a person who managed large
production projects?
14. The process of creating something new with value by devoting the necessary time and effort.
15. He financed his cotton gin with expropriated British crown property.

Quiz II. Essay

1. Explain entrepreneurship according to Frank Knight

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2. Differentiate high level kind of entrepreneurship from low level kind of entrepreneurship.

3. Explain entrepreneurship according to Hayek and Kirzner

_________________________________________________________________________________
________________________________________________________________________________________
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Answer Key Learning Activity 2

1. Oldest. Although, indeed entrepreneurs come from many different birth orders, there is a slight tendency for an
entrepreneur to be the oldest child in the family.
2. Married. While there has never been any statistical validation, most entrepreneurs are married when they start
their first significant venture. The spouse plays an important support role.
3. [Link] men still outnumber women entrepreneurs in terms of actual numbers, women entrepreneurs are
presently forming new ventures at two to three times the rate of men.
4. Thirties. Although ventures may be started at any age, the first significant venture is usually started in the early
thirties for men and late thirties for women.
5. Teens. An individual’s ability to handle ambiguity, the drive for independence, and creativity （important

characteristics for an entrepreneur） are evident early in life.

6. To be independent. The need for independence （The inability to work for anyone else） is what drives the
entrepreneur to take risks to work all the hours necessary to create a new venture.
7. Luck. Hard work, money and a good idea are necessary but not sufficient for a successful venture. The venture
formation by the entrepreneur is characterized also as being “lucky”-being in the right place at the right time.
8. Moderate risk takers. The myth that entrepreneur are high risk takers is nothing more than just a myth. The
calculating decision to risk everything and perhaps fail reflects moderate risk taking.
9. All of the above. New is an entrepreneurial magnet, as it implies creativity and venture creation, the drive of
every entrepreneur.
10. Doers. Entrepreneurs take pride in creating and doing. They are definitely not managers and planners- the
appropriate side of the entrepreneurial continuum. Rarely are they also good venture capitalist.

Chapter Quiz Answer key

1. Marco Polo
2. Thomas Edison
3. Venture Capitalist
4. Richard Cantillon
5. Low-level
6. Joseph A. Schumpeter
7. Frank H. Knight
8. Entrepreneurship
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9. Joseph A. Schumpeter
10. Frank H. Knight
11. Richard Cantillon
12. Frank H. Knight
13. Middle Ages
14. Entrepreneurship
15. Eli Whitney