Humboldt–Universität zu Berlin

Institute for Entrepreneurial Studies and Innovation Management

Professor Dr. Christian Schade

Economics of Entrepreneurship

Different concepts of the “Entrepreneur”

BA Tutorial, October 22

Winter Term 2009/10

Humboldt–Universität zu Berlin
Institute for Entrepreneurial Studies and Innovation Management
Professor Dr. Christian Schade

Contents
• Questionnaire on Entrepreneurial Aptitude
• Inventions and innovations
• Overview of Knight, Schumpeter and Kirzner
• 3 case studies: presentations and discussion

Tutorial Entrepreneurial Decision Making 1

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Humboldt–Universität zu Berlin
Institute for Entrepreneurial Studies and Innovation Management
Professor Dr. Christian Schade

Questionnaire on Entrepreneurial Aptitude

• In the column “Points”, write down the corresponding number of

points:
– For “Totally Disagree”: -2 points
– For “Somewhat Disagree”: -1 point
– For “Somewhat Agree”: +1 point
– For “Totally Agree”: +2 points

• Add all your values together

Tutorial Entrepreneurial Decision Making 2

Humboldt–Universität zu Berlin
Institute for Entrepreneurial Studies and Innovation Management
Professor Dr. Christian Schade

Questionnaire Results

• -100 to 0 points: Self-employment may not be for you. You will

probably be happier and more successful working for someone else.
However, only you can make that decision.

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Humboldt–Universität zu Berlin
Institute for Entrepreneurial Studies and Innovation Management
Professor Dr. Christian Schade

Questionnaire Results

• 1-35 points: You may not want to start a business alone. You may
want to look for a business partner who can compliment you in the
areas where you are weak. Keep in mind that having a partner can
bring with it difficulties you may not want to experience as well. Make
such a decision carefully and for the right reasons.

Tutorial Entrepreneurial Decision Making 4

Humboldt–Universität zu Berlin
Institute for Entrepreneurial Studies and Innovation Management
Professor Dr. Christian Schade

Questionnaire Results

• 36-70 points: You have potential but may want to improve your
skills in your weaker areas by seeking training or hiring someone with
the needed skills.

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Humboldt–Universität zu Berlin
Institute for Entrepreneurial Studies and Innovation Management
Professor Dr. Christian Schade

Questionnaire Results

• 71-100 points: You show strong aptitude for self-employment.

Tutorial Entrepreneurial Decision Making 6

Humboldt–Universität zu Berlin
Institute for Entrepreneurial Studies and Innovation Management
Professor Dr. Christian Schade

Invention and Innovation

Invention
• Inventions can be unambiguously defined by a patent office
• but: there are some inventions that can not be patented
• Patent:
– not a right to practice or use the invention
– provides the right to exclude others from making, using, selling,
offering for sale, or importing the patented invention for the term
of the patent, for a European patent 10 years from the filing date
• Complicated, long procedure
• European patent for 8 states costs about 30.000 €

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Humboldt–Universität zu Berlin
Institute for Entrepreneurial Studies and Innovation Management
Professor Dr. Christian Schade

European Patent Convention

Article 52: Patentable inventions

(1) European patents shall be granted for any inventions which are
susceptible of industrial application, which are new and which
involve an inventive step.

Article 57: Industrial application

An invention shall be considered as susceptible of industrial

application if it can be made or used in any kind of industry, including
agriculture.

Tutorial Entrepreneurial Decision Making 8

Humboldt–Universität zu Berlin
Institute for Entrepreneurial Studies and Innovation Management
Professor Dr. Christian Schade

European Patent Convention

Article 54: Novelty

(1) An invention shall be considered to be new if it does not form part of the
state of the art.

(2) The state of the art shall be held to comprise everything made available to
the public by means of a written or oral description, by use, or in any other
way, before the date of filing of the European patent application.

Article 56: Inventive step

An invention shall be considered as involving an inventive step if, having

regard to the state of the art, it is not obvious to a person skilled in the art.
(...)

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Humboldt–Universität zu Berlin
Institute for Entrepreneurial Studies and Innovation Management
Professor Dr. Christian Schade

European Patent Convention - Exceptions

Article 52: Patentable inventions

(2) The following in particular shall not be regarded as inventions within the
meaning of paragraph 1:
(a) discoveries, scientific theories and mathematical methods;
(b) aesthetic creations;
(c) schemes, rules and methods for performing mental acts,
playing games or doing business, and programs for computers;
(d) presentations of information.

(4) Methods for treatment of the human or animal body by surgery or therapy
and diagnostic methods practised on the human or animal body shall not be
regarded as inventions which are susceptible of industrial application within
the meaning of paragraph 1. This provision shall not apply to products, in
particular substances or compositions, for use in any of these methods.

Tutorial Entrepreneurial Decision Making 10

Humboldt–Universität zu Berlin
Institute for Entrepreneurial Studies and Innovation Management
Professor Dr. Christian Schade

Invention - Summary

• Invention
– Novelty
– Includes an inventive step
• Patentable Invention
– Invention
– Industrial application
– Some exceptions, e.g. computer programs

• Innovation?

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Humboldt–Universität zu Berlin
Institute for Entrepreneurial Studies and Innovation Management
Professor Dr. Christian Schade

Business Management Views on Innovation

Process-oriented view:
• Corresponds to the Anglo-American use of language
• Process of renewal; contains all phases, activities, and aspects that
are necessary for the development, introduction, and implementation
of an innovation
• BUT: Equalization of the term “innovation“ and the process of
innovation

Phases-oriented view:
• Very widespread
• Traces back to Schumpeter (Business Cycles)
• Invention - innovation - diffusion
• Strict sequential consecutiveness of the phases is questionable

Tutorial Entrepreneurial Decision Making 12

Humboldt–Universität zu Berlin
Institute for Entrepreneurial Studies and Innovation Management
Professor Dr. Christian Schade

Schumpeter’s View

• Schumpeter’s theory of economic development forms the starting

point for innovation theory
• Innovation: a substantial change in some production function
• Inventions are never an economic factor by themselves
• Possible innovations:
– Production of a new good or a new quality of a good
– Introduction of a new method of production
– Development of a new sales market
– Conquest of a new source of supply of raw materials or semi-
finished products
– Implementation of a re-organization

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Humboldt–Universität zu Berlin
Institute for Entrepreneurial Studies and Innovation Management
Professor Dr. Christian Schade

Summary: Invention and Innovation

• An invention becomes an innovation by commercialization

• An invention itself may have little or no economic use

• On the other hand, an innovation does not need to be based on an

invention; it may also be a new combination or application of already
existing factors

Tutorial Entrepreneurial Decision Making 14

Humboldt–Universität zu Berlin
Institute for Entrepreneurial Studies and Innovation Management
Professor Dr. Christian Schade

Definitions of the “entrepreneur”

Knight Schumpeter Kirzner
Main idea uncertainty innovation arbitrage/
equilibrium
Activities management and production and marketing of search for arbitrage
responsibility innovations possibilities
Investment and Owns business Investor takes the risk No uncertainty,
Uncertainty Carries full Entrepreneur looses somebody entrepreneurs find
responsibility else’s money something that is “free”

Personality Responsible revolutionary doing Clever

Confident in own strong urge to be self- Sees gaps
judgement employed Knows how and where
Non-weighing of chances and to get market
risks information
Non-studying of all alternative
combinations
Profit residual from temporary monopolies price differences
uncertain profits
Macroeconomic destroy equilibria lead markets to
Impact equilibrium

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Humboldt–Universität zu Berlin
Institute for Entrepreneurial Studies and Innovation Management
Professor Dr. Christian Schade

Jeffrey Bezos and Amazon.com

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Humboldt–Universität zu Berlin
Institute for Entrepreneurial Studies and Innovation Management
Professor Dr. Christian Schade

Jeffrey Bezos and Amazon.com

• Entrepreneurs destroy equilibria (Schumpeter)
– What is an equilibrium?
– Reaction of competitors
– Destroyed equilibrium in conventional book market

• Entrepreneurs are not necessarily inventors (Schumpeter)

– Bezos founded the world’s first online store
– Bezos launched designing and programming of new technology and
software

• Entrepreneurs do not necessarily invest capital (Schumpeter)

– Bezos borrowed money from friends and family and therefore took
responsibility for repaying a debt of 1 million USD

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Humboldt–Universität zu Berlin
Institute for Entrepreneurial Studies and Innovation Management
Professor Dr. Christian Schade

Jeffrey Bezos and Amazon.com

• Entrepreneurs do not weigh up marginal costs and marginal utilities

(Schumpeter)
– Bezos drafted a business plan
– Bezos carefully chose the type of product, the location, tax privileges,
climate, standard of living etc.

• Revolutionary doing (Schumpeter)

– Bezos changed the shopping behavior

• Strong urge to be self-employed (Schumpeter)

– Bezos gave up his wall-street career to found a business of his own

• Entrepreneurs create temporary monopolies and therefore make profits

(Schumpeter)
– Bezos created a monopoly, (temporary?), and made profits of millions of
USD

Tutorial Entrepreneurial Decision Making 18

Humboldt–Universität zu Berlin
Institute for Entrepreneurial Studies and Innovation Management
Professor Dr. Christian Schade

Jeffrey Bezos and Amazon.com

• Entrepreneurs bring markets to equilibrium (Kirzner)

– Bezos created an equilibrium by creating supply for the existing
need/demand

• Entrepreneurs have the „knowledge“ where and how to get market

information (Kirzner)
– Bezos found a statistic that forecasted a yearly growth in internet usage of
2300 percent
– This meant high growth with comparatively low increases in costs

• Entrepreneurs exploit cost advantages (Kirzner)

– Bezos exploited the tax advantages and high living standards in Seattle

• Entrepreneurs turn uncertainty into risk (Knight)

– Bezos applied the excludability concept: discarded the music industry and
entered the publishing and book retail industry

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Humboldt–Universität zu Berlin
Institute for Entrepreneurial Studies and Innovation Management
Professor Dr. Christian Schade

Steve Jobs and Apple

Tutorial Entrepreneurial Decision Making 20

Humboldt–Universität zu Berlin
Institute for Entrepreneurial Studies and Innovation Management
Professor Dr. Christian Schade

Steve Jobs and Apple

• Entrepreneurs have a strong urge to be self-employed (Schumpeter)

– Steve Jobs was working as employee of Atari
– His partner Wozniak was working for Hewlett-Packard
– They both created the first Apple computer in a bedroom of Jobs’ parents
– They sold the first computers to Paul Jay Terrell, the founder of the first
computer store chain in the US

• People may act as entrepreneurs even if they do not own enough capital in
advance (Schumpeter)
– To get capital, Jobs sold his VW microbus, Wozniak his HP scientific
calculator, a fellow employee at HP offered them a 3 month credit,
suppliers agreed to accept payment after 30 days

• Entrepreneurs, in comparison to managers, carry full responsibility for their

actions (Knight)
– Steve Jobs had to cope with many flops: Apple I and Apple II were a huge
success, but Apple III and Lisa (first computer with graphical user
interface) were very expensive flops

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Humboldt–Universität zu Berlin
Institute for Entrepreneurial Studies and Innovation Management
Professor Dr. Christian Schade

Steve Jobs and Apple

• Entrepreneurs are revolutionary (Schumpeter)

– After several flops and Jobs leaving the Lisa project, Apple introduced the
revolutionary Macintosh computer, with a graphical user interface which
was a decade ahead of competitors
– Jobs left Apple in 1985 to create NeXT (a producer of powerful computers
for students and scientists) from own private money (initial investment: 7
million dollars)

• Entrepreneurs do not weigh all marginal costs and marginal utilities

(Schumpeter)
– Jobs got Harvard graduates to work as receptionists for NeXT
– He got the billionaire and later presidential candidate Ross Perot to pay 20
million dollars for a share of NeXT in 1987; at that moment, NeXT was a
company without a product!

Tutorial Entrepreneurial Decision Making 22

Humboldt–Universität zu Berlin
Institute for Entrepreneurial Studies and Innovation Management
Professor Dr. Christian Schade

Steve Jobs and Apple

• Entrepreneurs are managers with full responsibility (Knight)

– In 1997 Jobs returned to Apple as interim CEO
– In 2000 he officially became CEO of Apple

• Entrepreneurs bring about innovations and create temporary monopolies

(Schumpeter)
– Apple’s stylish iPod music player has taken the market by storm: Apple
sold more than 2 million units in one quarter of 2004 and got a market
share of 87.5 %
– Apple iTunes Music store, started in 2003, had a market share of 70% in
2007 and had sold more than 4 billion songs by January 2008
– In June 2007 Apple launched the iPhone; people started to queue days in
advance to get one; in January 2008 sales had reached 4 million iPhones
worldwide
– At the same time, Apple was already presenting the next product: the
MacBook Air, the world’s thinnest notebook

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Humboldt–Universität zu Berlin
Institute for Entrepreneurial Studies and Innovation Management
Professor Dr. Christian Schade

Robert Young and Red Hat Linux

Tutorial Entrepreneurial Decision Making 24

Humboldt–Universität zu Berlin
Institute for Entrepreneurial Studies and Innovation Management
Professor Dr. Christian Schade

Robert Young and Red Hat Linux

• Entrepreneurs have a strong urge to be self-employed (Schumpeter)

– Robert Young got self-employed with Vernon Rentals & Leasing Inc.

• The “pure” entrepreneur acts due to his cleverness to detect and exploit
situations where the selling price of items exceed their buying price (Kirzner)
– In the year 1991, with his firm “ACC PC Unix and Linux Catalog”, Young
selling software packages at a profit rate of nearly 50%
– However, he managed to foresee that his business model would come to
an end once the Linux distributions would reach the shelves of the large
American software chains (who would be “Kirzner” entrepreneurs
themselves)

• Entrepreneurs manage and carry full responsibility (Knight)

– Bob Young figured out that he needed to make Linux a real brand
– He managed to create a very good founding team by working with Marc
Ewing: the team had now a programmer with a superior Linux version (a
user-friendly version), and a distribution specialist in the search for a
Linux brand

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Humboldt–Universität zu Berlin
Institute for Entrepreneurial Studies and Innovation Management
Professor Dr. Christian Schade

Robert Young and Red Hat Linux

• Entrepreneurs identify opportunities, something that is “free” (Kirzner)

– Employees of Red Hat only developed a small part of the software in the
Linux distribution
– Almost everything is developed by a large number of enthusiastic
programmers spread all around the globe, who work in their spare time
and make their software available via Internet download
– What Red Hat Linux still has to do is identify and remove mistakes in the
source code, which usually happens within 24 hours after the publication
of the software

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