Файл: Н.П. Морозова Limited Liability Companies in the ГюЛ. Mergers and Takeovers. Fundamentals of Entrepreneurship.pdf

25

capitalist. A common contract during that time provided a loan to the merchant-adventurer at a 22.5 percent rate, including insurance. While the money person was a passive risk taker, the merchant-adventurer took the active role in trading, bearing all the physical and emotional risks. After the successful completion of a journey by the merchant-adventurer, the money person took most of the profits (up to 75 percent), while the entrepreneur merchant settled for the remaining 25 percent.

MIDDLE AGES

In the Middle Ages, the term entrepreneur was used to describe both an organizer of musical performances and a manager of large building projects. In such projects, this person did not take any risks, but merely managed the project using the resources provided. 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 connection of risk with entrepreneurship developed in the 17th century. At that time an entrepreneur was a person who entered into a contract with the government to perform a service or to supply stipulated products. Since the contract price was fixed, any resulting profits or losses reflected the efforts of the entrepreneurs - the better they worked the more profit they had. One of the entrepreneurs in this period was John Law, a Frenchman, who was the founder of the royal bank of France and the Mississippi Company, which had an exclusive franchise to trade between France and the New World. 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; this eventually led to the collapse of the company. Richard Cantillon, a well-known English economist at the beginning of the 17th century, understood Law’s mistake. Cantillon developed one of the first entrepreneur definition. He is regarded by some researchers as the founder of the term. He viewed the entrepreneur as a risk taker because merchants, farmers, craftsmen, and other sole proprietors “buy at a certain price and sell at an uncertain

price, therefore operating at a risk.”

18TH CENTURY

Finally, 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 (the present-day venture capitalist). One reason for this differentiation was the industrialization occurring

26

throughout the world. Many of the inventions developed during that time were reactions to the changing world, as was the case with Thomas Edison, the author of many inventions. He was developing new technologies and was unable to finance his inventions himself. Edison raised capital from private sources to develop and make experiments in the fields of electricity and chemistry. Edison was a capital user (an entrepreneur), not a provider (a venture capitalist). In contrast, a venture capitalist is a professional money manager who makes risk investments from a pool of equity capital to obtain a high rate of return on the investments.

19TH AND 20TH 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 manages an enterprise for personal gain. He pays current prices for the materials consumed in the business, for the use of the land, for the services he employs, and for the capital he requires. He contributes his own initiative, skill and ingenuity in planning, organizing and administering the enterprise. He also assumes the chance of loss and gain consequent 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.

Andrew Carnegie is one of the best examples of this definition. Carnegie invented nothing. Using new ideas he developed new technology into products to achieve economic results. Carnegie, who descended from a poor Scottish family, made the American steel industry one of the wonders of the industrial world, primarily thanks to his ability to win competition, rather than his inventiveness or creativity.

In the middle of the 20th century, the notion of an entrepreneur as an innovator was established: The function of the entrepreneurs is to recreate or revolutionize the pattern of production by introducing an invention or, more generally, by using new technological possibilities for producing a new commodity or an old one in a new way, by opening a new source of supply of materials or a new outlet for products; by reorganizing an old industry and creating a new one.

In this definition the concept of innovation and newness is an integral part of entrepreneurship. Indeed, innovation, the act of introducing some new ideas, is one of the most difficult tasks for the entrepreneur. The newness can consist of anything from a new product to a new organization structure.

27

Edward Harriman, who reorganized the railroad in the United States, or John Morgan, who developed his large banking house by reorganizing and financing the nation’s industries, are examples of entrepreneurs fitting this definition.

These organizational innovations are as difficult to develop successfully as the more traditional technological innovations (transistors, computers, lasers) that are usually associated with the word invention.

ENTREPRENEUR DEFINITION

The exploration of the aspects of entrepreneurship from a business (economic), managerial, and a personal perspective in the 20th century is reflected in the following judgments of an entrepreneur.

In almost all of the definitions of entrepreneurship, there is an agreement that we are talking about a kind of behavior that includes:

1)initiative taking;

2)the organizing and reorganizing of social and economic mechanisms to turn resources and situations to practical application;

3)the acceptance of risk or failure (readiness to risk).

From an economist’s point of view, an entrepreneur is one who brings resources, labor, materials, and other assets into combinations that make their value greater than before, and also one who introduces changes, innovations, and a new order.

From a psychologist’s point of view, an entrepreneur is such a person that is typically driven by certain forces - wish to obtain or attain something in life, to make experiments, or perhaps to escape authority of others (gain independence).

From a capitalist philosopher’s point of view the same person is seen as one who creates wealth for others as well who finds better ways to utilize resources, and reduce waste (loss), and who produces jobs others are glad to get.

To one business person, an entrepreneur may appear as a threat, an aggressive competitor, whereas to another business person the same entrepreneur may be an ally, a source of supply, a customer, or someone good to invest in.

While each of these definitions views entrepreneurs from a slightly different perspective, each contains similar notions, such as newness, organizing skill, creating ability, wealth increase, and risk taking. Each definition is somewhat restrictive because entrepreneurs are found in many

28

professions - education, medicine, research, law, architecture, engineering, social work, and distribution. Therefore, to include all types of entrepreneurial behavior, one researcher has proposed the following definition of entrepreneurship: Entrepreneurship is the process of creating something different (new) with value by devoting the necessary time and effort, assuming the accompanying financial, psychic, and social risks, and receiving the resulting rewards of monetary and personal satisfaction and independence.

Just as the concept of entrepreneurship has developed gradually over time as the world’s economic structure has changed and has become more complex, so it will continue to evolve to embrace new realities. As the need to promote entrepreneurship becomes more urgent, so does the need to understand what it is and how it operates in a variety of situations.

B

THE FUNDAMENTALS OF ENTREPRENEURSHIP

THE ENTREPRENURIAL DECISION PROCESS

For the person who actually starts his or her own business, the experience is filled with enthusiasm, frustration, anxiety, and hard work. There is a high failure rate due to such things as poor sales (lack of demand), intense competition, lack of capital, or lack of managerial ability. The financial and emotional risk can also be very high. What, then, causes a person to make this difficult decision?

Many individuals have difficulty bringing their ideas to the market and creating a new venture. Yet, entrepreneurship and the actual entrepreneurial decision have resulted in several million new businesses being started throughout the world, even in previously controlled economies such as those of China, Hungary, Poland, and Russia. While no one knows the exact number, in the United States (which leads the world in company creation) estimates indicate that from 1 to 2 million new companies have been created each year in recent years.

Indeed, millions of companies are created despite recession, inflation, high interest rates, lack of infrastructure, economic uncertainty, and the fear of failure. Each of these companies is created through a very personal human process that, although unique, has some characteristics common to all. Like all processes, the entrepreneurial decision entails a movement, from something to something - a movement from a present life-style to creating a new enterprise.

29

CHANGE FROM PRESENT LIFE-STYLE

The decision to leave a career or life-style is not an easy one. It takes a great deal of energy to change and to create something new. As a rule individuals tend to start businesses in areas where they worked before. Most of the new companies are created by individuals who worked in the field of research and development (R&D), and marketing. While working in technology, individuals develop new product ideas or processes. They quit their jobs to create their own companies when these new ideas are not accepted by their employers. Similarly, individuals in marketing have become familiar with the market and customers’ unfilled wants and needs, and they make a decision to start new enterprises to fill these needs.

Perhaps an even stronger incentive to overcome the inertia and leave a present life-style to create something new comes from a negative force - disruption. A significant number of companies are created by people:

1)who have retired;

2)who are relocated due to a move by the other member of the family (in most cases a husband may get a job in a new location);

3)who have been fired. (A study in one major city in the United States indicated that the number of new business listings in the Yellow Pages increased by 12 percent during a layoff period.);

4)who have received an educational degree. (For example, a person who is not promoted after receiving a degree may become frustrated and decide to leave and start a new company.)

What causes an individual to create a new company due to personal disruption? There are o lot of other occupations rather than an entrepreneur. The decision to start a new company occurs when a person perceives that creating a new enterprise is both desirable and possible.

DESIRABILITY OF NEW VENTURE CREATION

The perception that starting a new company is desirable results from an

individual’s culture, subculture, family, teachers, and peers. In a country where an individual who successfully creates a new business is honored and respected - more companies will be created. For example, in the United States there has always been a high value on being one’s own boss, having individual opportunity, being a success, and making money - all aspects of entrepreneurship. Therefore, it is not surprising to find a high rate of company creation in the United States. On the other hand, in some countries successfully establishing a new business and making money are not as highly

30

valued, and failure may be a disgrace. Countries with such cultures (national traditions) do not have as high a business creation rate.

No culture is totally for or against entrepreneurship. Many subcultures (local traditions) shape their own value systems. Even in the United States entrepreneurship is not supported and promoted in the same way. In supportive environments where creating a new company is one of the best occupations, more individuals actively create new enterprises.

In Moscow most of the new companies (about 40%) operate in trade, 30% operate in the field of R&D, all the rest operate in building, transport and other fields.

In addition to local traditions, family traditions are very important too. Studies of companies in a variety of industries throughout the world indicate that 50 to 70 percent of the founders of companies had fathers or mothers who had an independent occupation.

Encouragement to create a company is further gained from teachers in schools, who familiarize the students with entrepreneurship as one possible career path. Schools with courses in entrepreneurship and innovation tend to develop entrepreneurs. Taking the entrepreneurship course increases the probability for such students to become entrepreneurs. An area having a strong education base is almost always a prerequisite for entrepreneurial activity and company creation.

Finally, peers are very important in the decision to create a company. More new companies are created in an area with a meeting place where entrepreneurs and potential entrepreneurs can discuss ideas, problems, and solutions.

POSSIBILITY OF NEW VENTURE CREATION

However, to have a desire to become an entrepreneur is not enough. There must be possibilities. So the question is: What makes it possible to create a new company? Several factors may exist - government support, professional background, marketing experience, initial finances, and role models.

The government contributes by providing the infrastructure to support a new venture. When we speak about infrastructure, we mean roads, communication and transportation systems, utilities, and so on. It is no wonder that more companies are created in the United States because of highly developed infrastructure and economic stability compared with other countries. Even the U.S. tax rate for companies and individuals is less than in

31

many countries. Countries that have high tax rate, particularly for individuals, can suppress company creation because a significant monetary gain cannot be achieved, but the financial, psychic, and social risks are still present.

The entrepreneur should also have the necessary professional background. An education and previous business experience give a potential entrepreneur the skills that are necessary to overcome all the difficulties in creating and managing a new enterprise.

Marketing experience also plays a critical role in creating a new company. The only presence of an idea to create a new product or service is not enough. For successful product launching to the market, there should also be a certain practical knowledge of marketing (so called know-how) necessary to choose the best total combination of product, price, distribution, and promotion. A company is more successful if there is a market demand rather than a demonstration of technological capabilities of the producer.

Financial resources are necessary for a new company creation. While most of the start-up money for any new company comes from personal savings, credits, friends, and relatives, there is often a need for additional start-up capital. Each new venture has a common trait - the need for risk capital. Risk-capital investors play an essential role in the development and growth of entrepreneurial activity. When start-up capital is readily available, more new companies create.

Finally, a role model (a live example of entrepreneurial success) can be one of the most powerful influences in making company creation seem possible. To see someone else succeed makes it easier to picture yourself engaged in a similar activity - of course, even more successfully. A frequent comment of entrepreneurs when asked about their motivations for starting their new venture is: “If that person could do it, so can I!”

THE FUTURE OF ENTREPRENEURSHIP

As evidenced by the many different definitions, the term entrepreneurship means different things to different people. However, in spite of the differences, there are some common aspects: risk taking, creativity, independence, and rewards. These common aspects are supposed to be the driving force behind the notion of entrepreneurship in the future. One thing is clear - the future for entrepreneurship appears to be bright. We are living in the age of the entrepreneur, with entrepreneurship endorsed by educational institutions, governmental units, society, and corporations. Entrepreneurial

32

education has never been so important in terms of courses and academic research.

Various governments have also taken an increasing interest in promoting the growth of entrepreneurship. Individuals are encouraged to create new businesses and are provided such government support as tax incentives, buildings (space), roads, and a communication system - a strong government infrastructure - to facilitate this creation process. The encouragement by the federal and local governments is supposed to continue in the future as more law-makers understand that new enterprises create jobs and increase the economic output in an area.

Notes:

disruption - change of job or life-style

Yellow Pages - telephone directory that lists businesses according to the goods and services they offer

layoff period - the stopping by a business of a worker’s employment at a time when there is little work

peer - an equal in rank, age

C

ENTREPRENEURSHIP IN RUSSIA

The role of entrepreneurship is of interest to business people, politicians, college professors and students.

While entrepreneurship research has focused on entrepreneurs and their businesses in the Western countries, the aspects of entrepreneurship in Russia have received limited attention. The dramatic changes that have occurred in the once controlled economy of Russia in the 1990s have raised many questions. Can entrepreneurship in Russia change the traditional statedominated system with limited economic freedom and contribute to global market developments? What is the profile of Russian entrepreneurs? What is necessary to successfully carry out entrepreneurial activities in Russia?

Entrepreneurship as a social phenomenon reflects the basic conditions that foster the economic development as a result of human creativity, new ideas, and innovations. There is a general agreement among the scholars that entrepreneurship facilitates economic freedom and economic creativity. Economic freedom makes available a certain amount of rights that guarantee independent decision-making in choosing the type and field of economic