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Essence of Entrepreneurship
For the first time, entrepreneurship was spoken of as a concept in eighteenth century. French economist Jean-Baptiste Say and English scientist-economist Adam Smith made a classic definition of an economic science out of it.
In 1803, Jean-Baptiste Say has formulated definition of an enterprise activity as connections and combinations of three classical factors of manufacture - land, money, and labor. The basic Say’s thesis consists in recognition of an active role of businesspersons in product creation. The income of the businessperson, in Say’s opinion, is compensation for work and ability to organize manufacture and production sale, as well as provide “spirit of an order”. The businessperson is a person who undertakes the risk to own advantage from making any product.
Smith, on the contrary, represented economy as the self-regulated mechanism in which there was no place for creative entrepreneurship. The businessman, according to Smith, being the proprietor of the capital, run risks for the sake of realization of certain commercial idea and profit reception, as capital investments in this or that entrepreneurship always comprise a risk element. According to Smith, enterprise activity is also indemnification for taken risks.
To date, there is a considerable quantity of variants of interpretation of values of concepts “entrepreneurship” and “businessman”. It is possible to consider the definitions of American scientist, Professor Robert Hisrich, and English Professor, Alan Hosking, as the most capacious ones. Robert Hisrich defines entrepreneurship “as process of creation something new that possesses cost, and the businessman - as person, who spends for this all necessary time and forces, incurs all financial, psychological and social risk, receiving in the award money and satisfaction reached”. Professor Alan Hosking confirms:
The individual businessman is the person who runs entrepreneurship at own expense, personally is engaged in a entrepreneurship management and bears a private responsibility for maintenance with necessary means, independently makes decisions. Its compensation is the profit got because of enterprise activity and a content that he tests from employment by free entrepreneurship. Nevertheless, along with it should take up all risk of losses in case of bankruptcy of its enterprise.
Thus, proceeding from these statements, it is possible to formulate definitive definition of entrepreneurship as of special kind of economic activity (as which it is necessary to understand the expedient activity directed on extraction of profit) that is based on the independent initiative, responsibility, and innovative enterprise idea.
Functions of Entrepreneurship
In market economy, entrepreneurship has general economic, resource, creative-search (innovative), social, and organizing functions.
1) General economic function is objectively caused by a role of the enterprise organizations operating under responsibility of the legal person and individual businesspersons, operating on its own behalf and under the property responsibility. Enterprise activity is directed on manufacture of the goods (works, services) and is fulfilled under the influence of system of economic laws of market economy (supply and demand, competition, cost, etc.), which is an objective basis of display of general economic functions. Entrepreneurship development is one of the defining conditions of economic growth, and increase in volumes of a total internal product and the national income. This factor also acts as display of general economic functions in system of economic relations.
2) Resource function is the important function of entrepreneurship. Entrepreneurship development assumes an effective utilization of both reproduced and limited resources, and it is necessary to understand that all resources are first of all resources, considering both non-material conditions and manufacture factors (in wide understanding of this word): a manpower, the earth and natural riches, means of production and scientific achievements, and enterprise talent. The businessperson can achieve the highest successes if he/she manages to generate scientific and technical ideas and innovation in a field of activity in which he/she creates own entrepreneurship and unite it with use of the qualified labor and effective consumption of all kinds of resources. However, the pursuit of the maximum income (profit) frequently leads to injurious use of resources. Businesspersons tend to harm to environment and the population. In this connection, the great value is devoted to regulating role of the state, establishing the forms of responsibility of executives for misuse of resource function. This function of entrepreneurship is inconsistent. On the one hand, the executive is interested in rational use of resources, and on the other one, he/she can ruthlessly misuse them.
3) Creative-search (innovative) function is connected not only with use in the course of enterprise activity of new ideas but also with development of new means for achievement of objects in view. This function of entrepreneurship is closely connected with all other functions that supplement each other. It follows from level of economic freedom of subjects of enterprise activity and from decision-making conditios.
4) Social function is shown in possibility of each capable person to be proprietor and show the individual talents and possibilities. This function of entrepreneurship is more shown in formation of people enterprising, which is inclined to independent economic-economic activities, capable of creating own entrepreneurship, overcoming resistance of environment, and achieving an object in view. However, the layer of hired workers, which, in turn, economically and socially depends on steady activity of the enterprise enterprises, simultaneously grows. An enterprise will function more effectively if there will be a size of receipts of their means in budgets of various levels and in the state off-budget social funds. Entrepreneurship development provides growth of quantity of workplaces, reduction of a rate of unemployment, increase of a standard of life, and a social status of hired workers.
5) Organizing function of entrepreneurship is shown in acceptance by executives of the independent decision on the organization of own entrepreneurship, in formation of enterprise management, in creation of difficult structures, in change of strategy of activity of firm etc. Organizing function appears especially accurately in fast development of small and average entrepreneurship and in “collective” (network) entrepreneurship.
Thus, the essence of entrepreneurship is full shown in a combination of all named functions and is connected with these functions, which are objectively inherent in civilized entrepreneurship but in many respects depend on subjects of enterprise activity and the state support.
Kinds of Entrepreneurship, Their Interrelation, and Features of Participation in Entrepreneurship
Depending on the maintenance of enterprise activity and its communication with the basic stages of producing process, different kinds of entrepreneurship are distinguished: industrial, commercial, financial, consulting, insurance, and intermediary.
Industrial entrepreneurship, as the form of the independent and initiative activity that is directed on extraction of profit, assumes realization of direct production functions, i.e. production, performance of works, or rendering of services, which just like goods, are subject to the subsequent realization to end users or intermediaries. Thus, the executive can perform (and often does it) other functions of producing process, but function of manufacture remains the main one.
In the organizational relation, entrepreneurship in sphere of direct manufacture assumes process of technological connection of live work (labor) with subjects and the means of labor, which results in reception of certain production (work, service).
For realization of industrial activity transport, building, repair, information, and other services, industrial and social (for the organization personnel) character is required as a rule. Rendering all these activities on a contractual basis (after preliminary marketing studying and estimation) involves foreign organizations or private persons (other businesspersons).
Industrial enterprise activity is usually connected with big monetary expenses, where gain receipt and speed of a turn of the capital are much lower, than in commercial, financial, and consulting entrepreneurship and do not coincide in time. This feature is characteristic for large industrial and building projects and also the majority of agricultural branches, where even current industrial expenses are repaid, as a rule, only within a year (at cultivation and feeding of a horned cattle, for example, not less than one and a half years are needed). Sharp requirement for money resources is felt especially, as the executive entry an initial stage of activity. It testifies that during the separate period’s attraction of extra means of bank and other credit institutions with which the confidential partner connection is based on qualitative entrepreneurship, planning and strict performance of treaty obligations should be established.
The maintenance of commercial entrepreneurship is an activity at a commodity stage of a turn of the capital, which covers an exchange, distribution and consumption of made production (services). Defining role in this kind of enterprise activity is played by commodity-money and trading-exchange operations and transactions on purchase and sale of the goods (services). Commercial entrepreneurship is by the nature more risky than industrial one, since in this case, activity of the businessman is influenced by two factors. Firstly, it directly depends on the consumer market in which a conjuncture is very much variable. Secondly, it is connected with storage and constant moving of the goods on considerable distances, which creates certain difficulties with maintenance of their safety and observance of contractual conditions on delivery terms, quality of the goods, and timeliness of calculations.
Commercial entrepreneurship can be organized in two variants and have different character. The first one has industrial-commercial character. High degree of interrelation and complementarities in spheres of manufacture and realization of the goods is peculiar for this character, but the manufacturer of production distracts from the primary goals.
The second has commercially intermediate character. It assumes allocation of enterprise activity as the independent subject of a special category of legal and physical persons, who are intermediaries who take part in formation of channels of distribution of the goods and, thus, represent either own interests or interests of the manufacturer or the consumer.
Financial entrepreneurship is an activity of businessmen at a monetary stage of a turn of the capital, when cash and non-cash money, currency, and securities which have properties to depreciate or quickly change a course act as objects of transactions of specific kinds of the goods. The main infrastructures of financial entrepreneurship and their functions are discussed below.
Banks represent the specialized financial organizations which, firstly, accumulate free money resources (contributions); secondly, give them in time to clients in a form of credit (loans); and thirdly, render intermediary services on mutual payments and calculations between the organizations (establishments) and (or) physical persons.
The investment companies and funds represent the financial organizations (usually in the form of open joint-stock companies) which profits by concentrating the and further investing other’s money with peak efficiency in those or other manufactures (projects).
Stock exchanges are organizational issued and regularly functioning securities markets, which are is similar to commodity exchanges though with a dominant role in realization of transactions that brokers and dealers perform.
The essence of the given kind of entrepreneurship consists in the fact that certain persons, advisers, who are qualified experts in any area, give on a paid basis advice and recommendations to other businessmen or citizens concerning the competence. They reveal and estimate problems and possibilities, as well as give the recommendation of corresponding measures and the help in their realization under matters of law, economy, management of the organization, book keeping, and the taxation concerning various technological aspects of manufacture. In foreign practice, commercial consultations carry the name consulting.
Consulting services can be fulfilled in the form of single councils and also by realization of the complex projects, including revealing and the analysis of problems, working out of measures under their decision, and help in project realization. Thus, various methods of consultation, including expert, process, and training, can be applied. The essence of expert consultation consists in the fact that the adviser independently spends all stages of work - starting from diagnostics of a problem before rendering assistance on introduction of recommendations. During the process of consultation experts involve in this work a client, and at training consultation, prepare the client for independent development of the decision (conducting the process with lessons in various forms).
Insurance entrepreneurship consists in the fact that the businessman guarantees an insurer a certain payment indemnification of a possible damage to property, values, or life as a result of an emergency. Such kind of activity can be considered as the special form, a version of the financially-credit entrepreneurship, meaning that the businessman receives an insurance payment which returns only under certain circumstances, which is insured event approach. Calculations prove that at rational parities of the size of an insurance payment and the insurance sum, taking into account probability of occurrence of insured event, the income of the businessman is formed of the remained payments.
The direct relation to insurance entrepreneurship forms property insurance, personal life and health insurance, and risk insurance responsibility. Social insurance has no direct relation to entrepreneurship. Entrepreneurship is connected only with voluntary forms of insurance, and in the given market, services in the form of insurance protection are on sale.
One more kind of entrepreneurship is an intermediary one. As this kind of entrepreneurship closely adjoins and acts as a component of other kinds of entrepreneurship, it is pertinent to speak about intermediary in industrial, commercial, financial, and consulting spheres. Intermediary entrepreneurship is characterized by the fact that the businessman does not make production, trade goods, securities, and give the monetary credit or advice but only renders intermediary services. The place of the intermediary is between the manufacturer, or the seller of the goods, and the buyer, and promotes the transaction, uniting them in the general chain of enterprise operation.
All listed kinds of entrepreneurship are closely connected among themselves. Industrial one usually follows trading, however, all of them demand money resources, Sometimes, one businessman performs the functions of a production worker, the dealer, and financier. Intermediary and insurance entrepreneurship can fulfill manufacture and granting of services. There are combined, complex kinds of entrepreneurship at the expense of a combination of known kinds by a businessman.
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