Entrepreneur, entrepreneurship

French term (taken over into English) for "enterpriser" or "one who undertakes." An entrepreneur is a person who detects a previously untapped opportunity to make substantial profits (either by lowering the costs of producing existing good/services or by creating brand new ways for people to satisfy their wants through new products) -- and then takes the initiative in bringing together the necessary factors of production to exploit this opportunity, typically by organizing a new business firm (or perhaps a new subdivision of an existing firm) for the purpose. The new opportunity which the entrepreneur has detected may involve the introduction of a new good or service only recently invented or improved. It might involve introducing some existing good or service into a new market area where it is presently unavailable or deepening the original market by finding and publicizing new ways for new groups of customers to use it. It might involve recognizing the potential of some new production technology for dramatically lowering the costs of production of an existing good or service, making it possible to garner huge sales increases at the expense of much higher cost substitutes that are thereby rendered obsolete and no longer competitive. Entrepreneurs thus serve an important role in enabling the economy to adapt to changing conditions and new possibilities for material improvements by creating new production organizations, and even whole new industries. Because of its essential role in initiating the process of production, entrepreneurship is identified by some economists as a "fourth factor of production," alongside land, labor and capital.

In its essence, entrepreneurship involves looking ahead to foresee future conditions of supply and/or demand that will be quite substantially different from present conditions. Having arrived at a vision of the future based on observation of previously unnoticed trends, tentative theories, recent discoveries and inventions, and a large dose of creative imagination, the entrepreneur differentiates himself from the prophet, the social scientist and the idle dreamer by taking practical action to reallocate costly resources in the present so as to prepare for meeting an expected future demand. However, if the entrepreneur's vision of the future proves to be incorrect, all or part of the resources mobilized to prepare for that future may prove to have been wasted, so there are risks of large losses. The prospect of far above average profitability is normally necessary to attract the necessary resources into an undertaking with such a high possibility of loss. Being the first in the field with an exceptionally good idea may well yield far above average profits because of the possibilities for explosive sales growth and because of especially favorable pricing conditions enjoyed due to the temporary monopoly the firm enjoys until imitators can gear up to enter the marketplace.

The entrepreneur may personally bear all or most of the risk of the new enterprise by using only his own resources and thus becoming the sole owner of the business. Frequently, however, the entrepreneur will organize the business in such a way as to share the risks with others, either by borrowing part of the initial financing from banks or from wealthy passive investors or by selling bonds. The entrepreneur may even give up part of the ownership of the enterprise (and thus part of the claims on future profits) to other partners or share-holders willing to buy their way in after the entrepreneur has developed and explained the basic concepts of the new undertaking. However, such risk-sharing arrangements will normally be structured by the entrepreneur in such a way that the entrepreneur retains an ownership interest larger than his original share of the resources put at risk. In other words, there are financial returns to entrepreneurial creativity above and beyond the returns demanded for pure risk-bearing. Entrepreneurship is something above and beyond risk-bearing or even ownership of the enterprise, even though any or all of these functions may happen to be performed by the same person in individual instances.

Because the entrepreneur originated the idea of the business venture and took the lead in mobilizing the human and non-human resources to make it a reality, the entrepreneur often takes on the role of operational management of the new enterprise as well, especially during the lean early years before the basic assumptions of the undertaking have been proved valid in practice. However this need not always be the case, and many highly gifted entrepreneurs in history seem to have been quite remarkably lacking in ordinary managerial ambitions and basic skills. Once the core entrepreneurial function of discerning the new profit opportunity and mobilizing resources to exploit it has been fulfilled, the task of exerting day to day control so that these resources are efficiently employed to meet the owners' planned objectives can well be delegated to professional managers who need not be either entrepreneurs or even share-holders.

Even though entrepreneurs frequently become managers, and even though professionally trained managers sometimes become entrepreneurs, the function of entrepreneurship is as separate and distinct from management as it is from ownership and risk-bearing. It is good to keep this in mind, because the term "entrepreneur" is sometimes applied incorrectly and indiscriminately in ordinary speech to any business owner or high-ranking manager.

[See also: factor of production]