Entrepreneurs fill a vitally important role in market economies. In this lesson, you’ll learn about the importance of entrepreneurship, different types of entrepreneurs and how they add value to an economy.
Meet Ernie. Once upon a time he, like most people, punched a clock for a wage. When he wasn’t working, he was pursuing his hobby of gourmet cooking. After a particularly trying day at work, Ernie decided to take the leap and become an entrepreneur.An entrepreneur is a person who takes a risk to start and operate a business.
Not everyone is cut out to be an entrepreneur. You need to have entrepreneurship, which is the ability and willingness to take the risk to develop and operate a business for profit or a non-profit organization to serve the needs of a particular group.
Factors of Production
A successful business typically needs to utilize all factors of production, which is just a fancy way of referring to resources necessary to provide a good or service.
Take Ernie’s new restaurant for example. He’ll need all the classical factors of production, which includes land, labor and capital. He needs to either purchase or lease property on which his new restaurant will sit. He’ll need to hire people to help him prepare and serve meals. He’ll also need capital to finance the new restaurant.
In addition to the ‘classic’ factors of production, he needs one final factor of production, which he will supply himself – enterprise. Enterprise is the ability to take all other factors of production and use them to create goods or services. Entrepreneurs, like Ernie, provide the enterprise to an economic activity.
Types of Entrepreneurs
Entrepreneurs don’t always fit into one neat little category. Let’s take a look at different types of entrepreneurs. In her book, Launching New Ventures, Allen identifies different types of entrepreneurs:
- Home-based entrepreneurs are people that establish businesses in the comfort of their home.
An example of a home-based entrepreneur is a freelance writer or novelist who works from home.
- Cyber entrepreneurs are people that conduct business completely online. People that sell crafts, antiques or used books on auction sites, such as eBay, are a prime example.
- Serial entrepreneurs enjoy the thrill of starting a new business, but they don’t want to stay around and operate it. Once the new venture gets off the ground, they move on to another start-up.
- Traditional entrepreneurs are people like Ernie who take the risk to start a business with the intention of owning, operating and obtaining profits from it.
- Non-profit entrepreneurs start non-profit organizations to serve a specific group. Contrary to popular belief, non-profit organizations can generate a tremendous amount of profits. The distinction between a for-profit and a non-profit is that a non-profit organization is not permitted to distribute its profits to its members.
Instead, profits are retained and invested to further the goal of the non-profit. A classic example of a non-profit is a non-profit hospital.
- Corporate venturers are people who work in large companies but are charged with finding new opportunities for the companies. They often operate in skunk works, which operate fairly autonomously. One of the most famous skunk works is at Lockheed-Martin, where advanced aircraft for the military are developed.
Engine for Growth ; Innovation
Entrepreneurs, like Ernie, are vital for economic growth and innovation. Entrepreneurs are willing to take the risk to bring their ideas into reality. They often create new products and entire new industries. Examples of entrepreneurship creating new products and services include Internet search engines, smart phones, computer tablets and social media sites.
These new products and services help grow the economy and create new jobs. They can even change the face of society. Just remember the iPhone, and you’ll see a good example of this.
Let’s review what we’ve learned:
- Entrepreneurship is the ability of someone to take a risk and start a business. A person who displays entrepreneurship and acts upon it is called an entrepreneur.
- A crucial factor of production is enterprise, which is closely related to entrepreneurship, and is the ability to take all the factors of production and use them to produce goods and services.
- You can classify entrepreneurs as home-based entrepreneurs, cyber entrepreneurs, serial entrepreneurs, traditional entrepreneurs, non-profit entrepreneurs or corporate ventures.
- Entrepreneurs serve a vital role in our economy through innovation and job creation, all of which contribute to the wealth of our economy and the participants in it.
After you have finished with this lesson, you should be able to:
- Define ‘entrepreneur’ and ‘entrepreneurship’
- Explain the importance of factors of production and enterprise in becoming an entrepreneur
- List several types of entrepreneurs and provide examples of each
- Summarize the role that entrepreneurs play in the economy