Application of Psychology for

Economic Development
 Environmental Factors in
Entrepreneurship
1. Family factors: Birth order, Family structure,
Father, Family support
2. Socioeconomic situations
3. Education
4. Entrepreneurial Ecosystem
1. Family factors :
• Family has been accepted as a crucial factor in entrepreneurship.
Various factors related to family that affect entrepreneurial
behaviour are:
• • Birth order
• • Family structure
• • Father
• • Family support
• Some studies have found that first born children tend to have
higher need for achievement, and hence are more enterprising,
because their parents set high standards for them. This
hypothesis, however, has been proved wrong in case of India.
McClelland (1961) suggests from study of samples of Indian
students from Madras that the younger children may have
higher nAch in India.
• Family structure also plays a major role. For
example, it is said that joint family system of
India reduces incentive for hard work,
promotes idleness and increases need for
dependency among children. Also, when a
child stays in a mother-child household (which
may result due to divorce or separation or
because the mother is unmarried), the need
for achievement is lower (McClelland, 1961).
• father has an overbearing influence on
development of entrepreneurial traits
• That family support is important not only to
start a business but also for success of same is
evident from a study by Deivasenapathy
(1996)
 Socio-economic Status :
The relation between socio-economic status (SES)
and motivation for entrepreneurship is
curvilinear. Businessmen in many countries tend
to have higher need for achievement if they
come from middle class families than if they
come from upper or working class background
(McClelland, 1961). Basically, there is a class sub-
culture corresponding to each class consisting of
certain values. This sub-culture affects attitude
towards entrepreneurship.
Education :
Education is an indispensable tool for skill development and
hence is an important factor in entrepreneurship. Not that
education is essential to start a small enterprise, but it
does help when an entrepreneur goes for a task which
needs specific skills or when the entrepreneur seeks to
expand operations beyond local level. McClelland (1966)
has observed that countries which invested heavily on
education on the average developed more rapidly
economically after a number of years when the educated
population have reached working age. Sinha (1968) has
also reported positive relationship between education and
aspiration in developed countries.
 Entrepreneurial Ecosystem
• Entrepreneurial ecosystem refers to the whole gamut
of social attitudes, cultural norms and values, and
state support to entrepreneurship
• These factors immensely contribute to perception
about entrepreneurship. For example, if in a society
business is looked at as an occupation of lower
status, people will be discouraged to be
businessmen.
• The Vaishya castes in India are placed below
Brahmin and Kshatriya castes. This places a lower
esteem on business occupations and discourage
other castes from taking up such occupations.
• The culture is not the only factor that makes
up the entrepreneurial ecosystem. There are
other factors that can facilitate an
entrepreneurial culture or hinder it.
• Some are :
• • Industrial climate.
• • Mentoring and networking
• • Financial support and extension facilities
made available by government
 Entrepreneurship and Entrepreneurial Behaviour

• First, entrepreneurship drives innovation and technical

change, and therefore generates economic growth
(Schumpeter, 1934).
• Second, as the Austrian economists have explained,
entrepreneurial action is the process through which
supply and demand are equilibrated (Kirzner, 1997).
• Third, entrepreneurship is an important process by
which new knowledge is converted into products and
services (Shane & Venkataraman, 2000).
• Fourth, entrepreneurship has become an important
vocation and we need to understand its role in the
development of human and intellectual capital (Zahra
& Dess, 2001).
• It is often said that a person cannot win a game that
they do not play. In the context of entrepreneurship,
this statement suggests that success depends on
people’s willingness to become entrepreneurs.
• Moreover, because the pursuit of entrepreneurial
opportunity is an evolutionary process in which
people select out at many steps along the way,
decisions made after the discovery of opportunities
—to positively evaluate opportunities, to pursue
resources, and to design the mechanisms of
exploitation—also depend on the willingness of
people to ‘‘play’’ the game
Characteristics of entrepreneurial behaviour

• Whereas there are different motivation theories which

attempt to explain the employee’s behaviour in general,
few academics have applied these theories to the study
of the entrepreneur (Canabal and O’Donnell, 2009).
• independence desire, higher tendency to risk, higher
need for achievement, locus of internal control, and
higher preference for innovation.
• Yet, the question remains unanswered as to whether
certain individual characteristics, traits and abilities
among nascent entrepreneurs tend to have a key
influence on the decision to become self‑employed.
 Definitions of Entrepreneur
• One major criticism of research in the area of
entrepreneurship is that researchers have not consistently
defined and operationalized what they mean by
“entrepreneurs” (Kaufmann & Dant, 1998)
• Mill (1848) provided one of the earliest definitions of
entrepreneurship and suggested that risk bearing was the
major feature that separated entrepreneurs from
managers.
• McClelland (1961) also argued that risk is an essential
element faced by entrepreneurs, and he argued that the
definition of entrepreneurship should center around the
responsibilities of initiating and being accountable for
business decisions.
• McClelland (1961) argued that entrepreneurs should
include both the owners of small businesses and other
managers with decision-making responsibilities.
• Following these arguments, some researchers have
included both small business founders and managers
when examining the role of achievement motivation.
• In contrast to Mill and McClelland, Schumpeter (1934)
argued that both entrepreneurs and managers face risk
and instead differ in terms of their emphasis on
innovation.
• The key notion behind this definition of
entrepreneurship is the idea of growth and creation of a
new business opportunity where one did not exist
previously.
• Researchers that follow this definition tend to
identify entrepreneurs as those who have
initiated or guided the process of new venture
creation (Shane & Venkataraman, 2000).
• Typically entrepreneurs are operationalized as
founders under this later definition.
• Because entrepreneurship researchers have tended to
study either a broader (both founders and managers)
or narrower (founders only) set of individuals, it is
unclear if need for achievement is important for all
types of entrepreneurial roles.
• Baum et al. (2000) argued that founders and managers
of small businesses may face different levels of
ambiguity and, thus, require different competencies.
• For example, founders may need higher opportunity
skills whereas individuals that assume the top role of
an existing small company may need more leadership
and managerial skills.
• Holland (1985), in his theory of vocational choice, argued that
individuals are most likely to be attracted to those career roles
that have work characteristics that match their personalities,
needs, and values.
• McClelland (1961) argued that individuals high in achievement
motivation are more likely to pursue occupations that allow for
more control over outcomes, provide more direct and immediate
feedback on performance, and offer moderate levels of risk.
• McClelland (1961, 1965) further argued that entrepreneurial
environments are the most likely job environments to meet these
characteristics.
• Because entrepreneurial occupations provide more opportunities
to take advantage of the characteristics associated with high
achievement motivation, individuals who are high in need for
achievement will be more likely to be attracted to these roles than
other types of professions (Holland, 1985).
• The motivational system of a particular person should
have a decisive influence on his or her behavior, though
it is not the only determinant.
• According to Naffziger, Hornsby, and Kuratko (1994), the
performance of individuals is influenced by its intrinsic
nature and at the same time, it is a reflection of their
internal stimuli, i.e., their needs, attitudes and values.
• A person’s intrinsic nature depends on his or her
perceptions and subjective view of the world, potential
or innate abilities, and personality.
• Variables such as effort, ability, previous experience,
age, education, family history, and environment thus
influence behavior, such as the choice to become an
entrepreneur.
• The decision to start a business, according to
Plehn‑Dujowich (2010), consists of two levels:
rational and motivational.
• The rational level focuses on objective
reasons to adopt the task, including the
environmental conditions that reinforce or
penalize certain behaviors (Skinner 1987).
• The motivational level instead refers to
subjective reasons that reflect the decision
maker’s expectations.
• Any analysis of entrepreneurial behavior must consider the reasons
for this decision. They are a necessary, if not sufficient, element to
explain the entrepreneurial process (Garcia‑Villaverde,
Saez‑Martinez and Barba‑Sanchez, 1999).
• Although prior literature does not discuss the influence of
psychological dimensions on decisions, several authors agree that
three distinctive needs or motives mark entrepreneurs :
1. for achievement,
2. for competition, and
3. for independence.
( Brockhaus and Horwitz 1986; Herron and Robinson 1993)

• Other factors include a weak need for affiliation, the need for power,
a tolerance for ambiguity, preferences for innovation, a willingness to
take risks, and proactiveness or persistence.
• Starting with McClelland (1961), the need for achievement
has been associated with entrepreneurial behavior.
• This need prompts a strong desire to do things well, or
better than others, including those with authority. People
with a high need for achievement are likely to make plans in
advance. They also enjoy taking personal responsibility and
prefer quick, specific feedback about their actions.
• Empirical studies recognize the need for achievement in the
form of the entrepreneurial intentions of a given population,
as well as in retrospective studies of the attitudes and
characteristics of existing entrepreneurs.
• Regardless of the approach, many studies thus highlight the
importance of a need for achievement as a characteristic of
entrepreneurs and an influence on business success.
• Regarding the need for competition, White (1959) has
proposed the notion of competence or an ability to deal
effectively with the surrounding environment. It
pertains to a person’s desire to understand the
physical and social environment and thereby learn
how to obtain desired outcomes from it.
• Most literature also notes the importance of an
internal locus of control, which implies that the person
believes his or her actions, rather than random
elements, luck, or chance, lead to outcomes.
• Therefore, the need for competition is consistent with
a high achievement orientation, because an internal
locus of control causes the entrepreneur to believe his
or her actions will influence the results.
• Existing research on this psychological attribute (the
need for competition) offers two uses:
• (1) as a differentiating factor for entrepreneurs or (2) as
critical to the success of a business. In the first stream,
some authors distinguish entrepreneurs from the rest of
the population, but rarely do they discriminate between
different types of entrepreneurs, who all instead seem
characterized by a need for competition.
• However, entrepreneurs may reflect different typologies,
depending on the extent of their need for competition.
• Finally, the need for independence is a psychological
trait that many empirical studies offer as characteristic of
entrepreneurs or a driver that enhances
entrepreneurship.
 Independence
• Independence entails taking the responsibility to use one’s
own judgment as opposed to blindly following the
assertions of others.
• It also involves taking responsibility for one’s own life rather
than living off the efforts of others.
• Many investigators have observed that the entrepreneurial
role necessitates independence.
• First, the entrepreneur takes responsibility for pursuing an
opportunity did not exist before.
• Second, entrepreneurs are, in the end, responsible for
results, whether achieved or not achieved.
• Further, individuals may pursue entrepreneurial careers
because they desire independence
 Drive
• When entrepreneurs pursue opportunity, they
must take action to make it real.
• The four aspects of drive: ambition, goals, energy
and stamina, and persistence.
• Ambition influences the degree to which
entrepreneurs seek to create something great,
important, and significant when they pursue
opportunities. The nature of the entrepreneurial
ambition may include making money or the desire
to create something new, from conception to
actuality
• Ambition translates into setting high goals for
oneself and others. It is well known that high
goals lead to better performance results than
moderate or low goals (Locke & Latham, 1990). To
achieve high goals requires enormous energy and
stamina.
• When goal-directed energy is sustained over time,
it is called persistence or tenacity
• What sustains such effort over long periods? One
factor is high self-efficacy or task-specific
confidence
• The second factor is, strangely enough, love.
 Egoistic passion
• More precisely, it is a passionate, selfish love of
the work
• ego is a central motive.
• The true or rational egoist passionately loves the
work; they love the process of building an
organization and making it profitable.
• They are motivated to do what is actually in their
own interest—that is, to do everything
necessary.
National Knowledge Commission (NKC) on entrepreneurship
report:
some entrepreneurs were interviewed (NKC, 2007). Some
reason that they stated were :
• ‘Entrepreneurship offers the opportunity to create something
of one’s own’
• ‘Entrepreneurship is about the sheer joy of taking an idea and
making it work’, that is, it is related to intrinsic motivation
• ‘Entrepreneurship provides a constant learning experience
and a continuous process of growth’
• ‘Entrepreneurship allows possibilities for constant self-
actualization’, that is, it is about striving for growth and
realizing one’s inherent potential.
• ‘Entrepreneurship allows people to think outside the box and
make thoughts work’, that is, it fulfils need for creativity.
Characteristics of Entrepreneurs- Literature Survey
• Rao (1978) found Entrepreneurs as aggressive, mentally hyper-
active, opportunists, courageous, exploiting in nature and
possessing a pleasant personality.
• Gaikwad and Tripathi (1970) studied small entrepreneurs of the
Tanku region of the West-Godavari district in Andhra Pradesh
and found some pre-requisites of successful entrepreneurship :
initiative, drive and hard work.
• Bhattacharjee and Akhouri (1975) empirically tested the
entrepreneurial characteristics of small industry entrepreneurs.
They found that the most significant characteristics of successful
entrepreneurship are need for achievement, need for power,
need for independence, personality modernity, propensity to
take risk, business experience, leadership and symbolic or actual
rejection by father.
• Meredith and colleagues (1982) identified six
important personality traits of good
entrepreneurs :
1. Self-confidence
2. Risk-taking ability
3. Flexibility
4. Need for achievement
5. Internal Locus of Control
6. A strong desire to be independent
• Venkatapathy (1986) had compared the characteristics of
first generation entrepreneurs and second generation
entrepreneurs.
• Second generation entrepreneurs are those who hail from
business families (often Marwari, Bania, Parsi etc.) and
decide to start their own venture.
• Venkatapathy found that first generation entrepreneurs
are more enterprising, more social, less conventional,
more open to innovative practices and have more positive
self-concept than second-generation entrepreneurs.
• Pathak (1978) found that a strong desire for independence
was one of the personality dimensions of entrepreneurs
• Satvir Singh (1991) found that fast progressed
entrepreneurs are emotionally stable and
have high level of self-esteem.
• Sen and Seth (1992) found that entrepreneurs
were imaginative, cheerful, self-assertive,
decisive, ambitious, socially conscious,
mature, integrated and self-confident.
Characteristics of Female Entrepreneurs
• Shah (1987) had divided women entrepreneurs
into three categories to map their characteristics
across social classes :
• (i) Women entrepreneurs of middle and high
middle-income groups.
• (ii) Women entrepreneurs coming from middle
and low middle income groups and having
science and technology background.
• (iii) Women entrepreneurs of low income group
coming from the lower strata of society.
• Shah found some common features of women
entrepreneurs that were found in
entrepreneurs of all three categories, like need
for achievement, initiative, problemsolving
skills and risk-taking nature.
• The second category reported utilization of
experience and education as a motive. The low-
income group was motivated by economic
needs.
• Dhillon (1993) studied 40 women entrepreneurs in
and around Delhi.
• The findings were that the most dominant motives
were ‘fulfillment of ambition’ and ‘pursuit of own
interest’.
• The findings further reflect that women entrepreneurs
have a high need for achievement, independence
orientation and ability for decision-making.
• On the whole, Dhillon found that the typical women
entrepreneur likes the independence associated with
entrepreneurship and is a dreamer with high hopes,
has a positive orientation towards competition and is
confident of her ability to deal with problems.
• K. P. Singh (1993) studied women entrepreneurs in a major city of
India and found that the need for independence was the most
predominant motive for 46% of the respondents. She observes that
women entrepreneurs desired to be their own bosses and wanted
to maintain their own individual identity. ‘A strong desire to prove
oneself was the main motive with 21 percent of the respondents...
Earning money was the main motive with only 15 percent of the
respondents, most of whom were widows and divorcees who had to
field for themselves and their families’. The dominant source of
entrepreneurial motivation in K. P. Singh’s study are:
• To become independent 46.5%
• To prove oneself 21%
• To earn money 15.5%
• Job satisfaction 8.5%
• Competition 4.5%
• To gain status 4
• The NKC study has revealed that for female
entrepreneurs, the independence derived
from entrepreneurship and identification of a
marketable idea are the two most important
motivators.
• Comparing women entrepreneurs with male
entrepreneurs, the study states that more
entrepreneurs are more significantly
influenced by family background. The
comparison between the two types is given
under in a graph:
 Government Policies for
Promotion of Entrepreneurship
• The entrepreneurial ecosystem can become a
conducive environment promoting entrepreneurship
or a hindrance to the development of it. And a
singularly critical component of entrepreneurial
ecosystem is the government. Government policies
play an important part in motivating or demotivating
entrepreneurs. For example, in the 1960s and 1970s,
it was very tough for someone to open a company. It
was even tougher to sustain it because income tax
was as high as 97.5%.
• No wonder, even the most entrepreneurial
individual got appalled and couldn’t start
ventures. For those who still wanted to start their
business decided to do so outside India.
• For example, Aditya Birla raised an empire based
on industries in Malaysia and other south-east
Asian countries. While Indians contributed a lot to
the development of many other countries, the
policies of the government of India slowly became
more progressive.
• Post- 1992, the policies now are promoting
entrepreneurship in a big way.
Present policies and programs of
government to promote entrepreneurship
 Motivating and training people for
entrepreneurship and economic development