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CHAPTER ONE

INTRODUCTION

1.1    BACKGROUND TO THE STUDY

Management School of Entrepreneurship The management school suggests that an entrepreneur is a person who organizes or manages a business undertaking, assuming the risk for the sake of profit (Webster, 1966). Within this perspective, it is believed that entrepreneurship can be developed through conscious learning. In most cases, failure in entrepreneurial activities is attributed to poor management tactics. It is therefore, averred that training in management functions can help reduce business failure substantially and make success of an enterprise. Leadership School of Entrepreneurship ; The leadership school of entrepreneurship sees an entrepreneur as someone who relies on those he believes can help him achieve his purposes and objectives. This school proposes that a successful entrepreneur must be a‘people manager’, an effective leader, a mentor who motivates, directs and leads others to accomplish set tasks. Kao (1989) postulates that the entrepreneur must be a leader, able to define a vision of what is possible, and attract people to rally around that vision and transform it into reality. The two major elements in this approachare: getting the task accomplished and responding to the needs of those involved in task accomplishment.

Personality Based Model

Both personality- and human capital models are examples of character-based model. According to personality based model, entrepreneurs posses certain traits and these specific traits are expected to produce a strong impact on planning the business and on the choice of strategies and actions during the launching phase, which will in turn determine the entrepreneur's eventual success in the undertaking. In particular psychological but also economic research has analyzed in detail which personality characteristics are fundamental for entrepreneurial success. The following traits have been defined as useful in explaining the past success and in predicting the future development of a newly founded business: motivational traits, such as `need for achievement', `internal locus of control', and `need for autonomy', cognitive skills such as `problem-solving orientation', `tolerance of ambiguity', `creativity' and `risk-taking propensity', affective personality traits, such as `stress resistance', `emotional stability', and `level of arousal', and social skills, such as`interpersonal reactivity' and `assertiveness' (Caliendo and Kritikos, 2007). Empirical research aiming to underpin the theoretical propositions ex-post has taken two directions: it has compared the parameter values of these variables, gathered with the help of psychologically validated questionnaires, either between entrepreneurs and employees, or between successful and unsuccessful entrepreneurs.Previous research has also pointed out the limits of this approach. On the one hand, the size of the firm in terms of number of employees has been described as indispensable for the application of the model.According to this argument, the fewer employees a business has, the greater the impact of the owner's personality on its success. On the other hand, there is no consensus on the impact of personality structure on entrepreneurial success. Muller (1999) suggests that these traits should be used to predict the development of an individual as entrepreneur. Given the numerous personality variables that might influence entrepreneurial success, a second expectation is that each individual variable will only be a weak predictor for entrepreneurial success (Rauch and Frese, 2000). Gartner (1988) believes that no correlations will be found between traits and the success of an entrepreneur at all.

Human Capital Model

Human capital theories relate to entrepreneurial success in a similar way as personality structure: sufficient knowledge and working experience in the relevant fields enable business founders to choose more efficient approaches, for instance in organizing production processes, creating financial strategies, or analyzing markets for the new product. The human capital of the entrepreneur is the second part of the character-based approach after the entrepreneurial personality. Human capital theory is concerned with knowledge and experiences of small-scale businessowners. The general assumption is that the human capital of the founder improves small firm chances to survive (Bruederl, Preisendoerfer and Ziegler, 1992). Human capital acts as a resource. Human capital makes the founder more efficient in organizing processes or in attracting customers and investors. Different studies used various operationalizations of human capital. Bruederl et al. (1992) distinguished between general human capital years of schooling and years of work experience- and specific human capital- industry specific experience, self employment experience, leadership experience, and self-employed father and in general, trend indicated a small positive relationship between human capital and success.Human capital theory has an important implication: Since the theory is concerned with knowledge and capacities, the theory implies processes as well: human capital can be trained and improved. Additionally, if human capital acts as a resource it might be interesting to evaluate human capital implications of employees in small scale enterprises as well. In manufacturing settings it was shown, that a human resource management (HRM) system was related to performance especially when it was combined with a quality manufacturing strategy (Youndt, Snell, Dean, &Lepak, 1996).Most theoretical studies analyzing the impacts of human capital on the success probability of a newventure are concerned with the general human capital (such as the years 10 of schooling or working experience),with various kinds of specific human capital (such as experience in leadership, in self-employment or in the industry chosen for the new venture), or with genetic or sociological relations (such as self-employed parents or friends). Research on the impact of general human capital by Backes-Gellner and Lazear (2003) has shown that it is important for later success if business founders have already developed a broader knowledge base rather than specialized knowledge of a certain topic. Relationships between the human capital approach and the success rates of entrepreneurs have been empirically tested as well. Chandler and Hanks (1994, 1996) showed that thereis a positive impact when entrepreneurs found new businesses in the same branch where they had gathered previous work experience. The same authors observed only a weak impact of general human capital on success rates in terms of years of schooling. An explanation of the latter is given by Lazear (2004), and by Wagner (2003), who found empirical support for Lazear's `jack-of-all-trades model' which is not necessarily correlated with years of schooling. Also, Dunn and Holtz-Eakin (2000) found a positive correlation between success rates of business founders and self-employed parents.