The Entrepreneurial Skills

The role of the entrepreneur is to combine the (other) resources for production in an efficient way, so entrepreneurship should be assessed separately from labour.

Entrepreneurship is also seen as a managerial job, but the entrepreneur differs from the employed manager because the enterpreneur may not earn a salary, and certainly takes risks, and occassionally faces losses instead of profits.

When assessing the value of entrepreneurial activities, the returns to entrepreneurial skills are considered to be the economic profit earned by the business. The economic profit is the sum of money left after the costs of all other factors of production, including rents of natural resources and returns on own capital (equal to the opportunity cost of this capital, or the interest payable for a loan of the same amount) are deducted from the total revenue of the enterprise. When this economic profit is positive, then the entrepreneur earned an accounting profit higher than the normal profit, so that the enterprise was more successful than the average firms working in the industry using the same resources. This is the result of the entrepreneur’s knowledge and capabilities, organisational qualities, risk taking behaviour – altogether, his/her entrepreneurial skills.

Enterpreneurs can work in various business forms. The basic types of businesses can be classified by several aspects. The activity of the business defines categories of enterprises dealing with production, services, commerce; the ownership structure defines privately owned, state-owned businesses, or firms owned by foundations, organisations, firms being in municipal ownership, cooperative ownership, or mixed ownership. The profit-related categories are the profit-oriented (’for-profit’) businesses and the non-profit ones, by size of activity defines micro-, small, medium and large-scale enterprises, and finally, the legal form of the business defines categories of sole proprietorship, and partnerships, the most frequent partnerships being the private partnership, the limited liability company and the corporation (owned by stockholders).

A sole proprietorship is a business structure in which a single individual forms a single business entity for tax and liability purposes. This business can be started easily with a small amount of capital. It is suitable for implementing a good business idea quickly, and its greatest advantage for its owner is its flexibility, the possibility to make decisions alone without the involvement of others. The main disadvantages of this business structure are the limitations on available capital, difficulties of taking loans, and the unlimited liability of the owner. This latter means that the owner of the sole proprietorship is liable for any business debts, and if the business incurs losses then the private property of the owner must be used to pay for the debts of the business.

A partnership is the relationship of two or more entities (individuals) conducting business for mutual benefit. The private partnership has at least one internal partner and one

external (sleeping) partner, the internal partner should actively take part in the management of the business and bears unlimited liability for business debts. The external partner usually provides (most of) the initial capital needed for the business, bearing limited liability, that is, risking only the capital introduced into the partnership. For establishing a private partnership the partners have to prove that they can provide a legally required mimimum capital for the partnership.

A limited liability company is a business structure of legal entity, in which all the owners bear only limited liability for the debts of the business, their private properties are not risked. The relevant legal regulation defines the minimum amount of initial capital that is required for the foundation of a limited liability company, and the partners (the owners) are expected to take part personally in the operations and management of the company.

A corporation is a business structure of legal entity, which raises the initial capital by issuing stocks. The corporation – opposite to the formerly discussed partnership and company structures, which are based on the personal cooperation of all owners – is based on the financial contribution of the owners. The stockholders are owners of the corporation, their share is proportional to the stock they hold, they bear limited liability, and acquire property rights and membership rights in exchange of the stocks they own. Property rights mean that the stockholder is entitled to a dividend, that is, a share of the corporate profit, the membership right means that the stockholder is entitled to vote about the managerial decisions of the corporation at the annual general assembly of stockholders. The general assembly of stockholders elects the board of directors, and they appoint managers to direct the operations of the corporation throughout the year. Holders of small stocks usually do not take part at the general assembly, because their primary interests lie in their property rights and not their membership rights, therefore the management of the corporation will be decided by a few holders of large stocks. The decisions made at the general assembly require the majority votes of the stockholders present, and this is often achieved by a relatively small proportion of stocks. The proportion of stocks that is sufficient for the majority vote in the general assembly is called ’control stock’, the owner of such stocks has ’controlling interest’ over the corporation (Farkasné Fekete – Molnár, 2007).

To sum up the above, the contribution of the various factors of production can be determined in the value of the product, and the share of various factors in the income earned by the output can be calculated. This is called the functional distribution of factor incomes (also called Pareto’s marginal productivity theory of income distribution) and is calculated by the following formula: Q = MP_L×L + MP_K×K+ MP_A×A + MP_E×E , where Q is the quantiy of output, L, K, A és E are the amounts of labour, capital, natural resources and entrepreneurial skills, respectively, and the various values of MP are the marginal products of the respective factors of production. Measuring the factor shares in the money value of the output the above formula is multiplied by the price of the output, p giving: p×Q = p×MPL×L + p×MPK×K + p×MPA×A + p×MPE×E. As the prices of the various factors of production are determined by the value of their marginal product, their share in the value of the output also reflects the ratios of their marginal products (Kopányi, 1993; Farkasné Fekete - Molnár, 2007).

Review Questions

1) Describe the demand side and supply side of the factor markets.

2) What are primary and secondary factors of production?

3) What does the term ’derived demand’ mean?

4) Why is the labour supply curve a ’backward –bending’ curve?

5) What determine the lower and upper limits to wages?

6) What types of capital can you list?

7) Explain the notions of present value, future value, net present value.

8) Explain the notions of promissory note, bond, stock, and describe their yields.

9) What does economic rent, differential rent and pure land rent mean?

10) Describe the main attributes of sole trader, partnership, limited liability company and corporation, as forms of business entities.

11) Explain Pareto’s marginal productivity theory of factor incomes.

Problems and Questions to Develop Competence

1) Collect data in your place of residence about land prices, land rents and their relation to land quality. Explain the data.

2) Collect data in your place of residence about the wage levels of the past 5 years, and about the number of employed and unemployed people. Plot the wages against the employment data. Explain your results.

3) Describe the yields of bonds in the past 10 years in your country. Collect data about the interests that government bonds yielded, and the dividends that major corporate stocks yielded in the period. Explain your findings.