An enterprise is a business venture initiated by an entrepreneur, the person who assumes the organization, management, and risks of a business enterprise. Entrepreneurship is considered a factor of production that involves human resources, most commonly performing the functions of raising capital; organizing, managing, and assembling other factors of production; and undertaking business decisions. It involves a combination of initiative, foresight, and willingness to take the risks and undertake the new ventures required to establish a successful business.
The term entrepreneur (and consequently enterprise ) appears to have been introduced by the Irish banker and economist Richard Cantillon (c. 1680–1734). The term was popularized as a result of John Stuart Mill’s classic work, Principles of Political Economy (1848). To the classical economist of the late eighteenth century, the term described an employer, in the character of one person, who assumed the risk and management of an enterprise. In practice, entrepreneurs were not differentiated from capitalists until the nineteenth century, when their function developed into that of coordinators of processes necessary to large-scale industry and trade. At that point, much like today, the entrepreneur was involved in the management of the enterprise, in contrast to the ordinary capitalist, who merely owned an enterprise and might choose not to take any part in the day-to-day operation. Henry Ford is an example of the rising class of entrepreneurial manufacturers in the twentieth century in the United States of America. However, the entrepreneur’s functions and importance have declined with the growth of the corporation.
Nevertheless, the term entrepreneur had disappeared from the economics literature by the end of the nineteenth century. This was due to the fact that economists began to use the simplifying assumption that all individuals in an economy have perfect information. Under this assumption, there is no reason for an entrepreneur, or an enterprise, to exist. If individuals have perfect information, they will all make the same assessments of alternative economic activities. More recently, however, economists have increasingly removed this unrealistic assumption of perfect information, allowing once again for the presence of entrepreneurship in the literature. In addition, entrepreneurship has been added as the fourth production factor, after labor, capital, and natural resources.
Almost any business or organization can be called an enterprise, and an enterprise can be either private or public in nature. A private enterprise is a business organization especially directed toward profit and generating personal wealth for the owners. In other words, the owners and operators of a private business have as their main objective the generation of a financial return in exchange for their expense in time, energy, innovation, skills, and money. The private enterprise is the main institution of market capitalism, and as the price mechanism is a co-coordinating instrument, the entrepreneur performs a coordinating function. Free enterprise, which is the result of free markets, is another term used to denote market capitalism. Indeed, the terms enterprise, company, corporation, and organization are often used synonymously.
A firm is a unit that employs factors of production to produce goods and services. A firm is a commercial partnership comprising a collection of individuals grouped together for economic gain, especially when unincorporated. It is represented by the name or designation under which a company transacts business. The term became popularized in Ronald Coase’s 1937 article, “The Nature of the Firm.” Operating within a market involves some costs, but by establishing a firm and the authority to direct resources, certain costs are reduced. As Coase states, “When the direction of resources (within the limits of a contract) becomes dependent on the buyer in this way, that relationship which I term a ‘firm’ may be obtained” (Coase 1937, p. 392).
In an article published in 1972 in American Economic Review, Armen Alchian and Harold Demsetz defined a firm as a contractual structure subject to continuous renegotiation with the central agent, or the firm’s owner and employer. Thus, a firm is a hierarchical organization attempting to make profits. There are various types of firms, such as: (1) a sole trader or sole proprietorship, in which there is only one owner of the firm with unlimited liability; (2) a partnership, in which there are two or more partners who own, control, and finance the firm and have unlimited liability; (3) a private limited company (Ltd.) or corporation, in which a limited number of shares are issued and the firm is owned by shareholders who have limited liability. In the latter case, these corporations are legal entities, and the firms or corporations owned by the shareholders are treated by law as an artificial person.
By the latter half of the nineteenth century, corporations increased substantially, displacing other forms of enterprises. The control of industrial production thus became the responsibility of corporate finance, resulting in what the Norwegian-American economist Thorstein Veblen (1857–1929) called “absentee ownership.” Often, however, shareholding ownership is so widely dispersed that the majority of shareholders reluctantly experience the separation of ownership from control. That is, control can be maintained by a minority interest with access to corporate finance: “ownership continually becomes more dispersed; the power formerly joined to it becomes increasingly concentrated; and the corporate system is thereby more securely established” (Berle and Means 1933, p. 9). According to Veblen, absentee ownership has grave consequences for the structure of the society, because “law and politics … serve the needs of the absentee owners at the cost of the underlying population” (Veblen 1923, p. 6).
When an enterprise has operations in more than one country, this enterprise is named a multinational enterprise (MNE), a multinational corporation (MNC), or a transnational corporation (TNC). Such a firm engages in foreign direct investment (FDI) and owns or controls income-generating assets or value-adding activities in more than one country. A multinational enterprise can participate in the economic activities of a foreign country through five general means of involvement: (1) trading (importing or exporting, and incorporate transfers); (2) foreign direct investment (such as joint ventures, wholly owned subsidiaries, green-field FDI, brown-field FDI, acquisition [the firm can have a “majority” or “stake” interest], merger and acquisition, or privatization); (3) indirect (portfolio) investment; (4) agreements that do not involve money transfer from the part of the foreign partner (e.g. licensing agreement, franchising, turnkey projects, or management contracts), and (5) collaboration or strategic alliance with another enterprise in order to cope with pressures of intense global competition and increasingly complex and rapid technological development.
The United Nations and the governments of most developing nations use the term transnational, rather than multinational, to describe an enterprise that has operations in more than one country. The United Nations’ specialized agency, the United Nations Conference on Trade and Development (UNCTAD), for example, employs the following definition: “Transnational corporations comprise parent enterprises and their foreign affiliates: a parent enterprise is defined as one that controls assets of another entity or entities in a country or countries other than its home country, usually by owning a capital stake. An equity capital stake of at least 10 percent is normally considered as a threshold for the control of assets in this context.” Actually, this 10 percent rule has been accepted by the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD), thus identifying this to be the minimum equity stake for an investment to qualify as foreign direct investment and not a portfolio investment.
SEE ALSO Business; Capitalism, State; Corporations; Entrepreneurship; Mill, John Stuart; State Enterprise; Veblen, Thorstein
Alchian, Armen A., and Harold Demsetz. 1972. Production, Information Costs, and Economic Organization. American Economic Review 62 (5): 777–795.
Berle, Adolf A., Jr., and Gardiner C. Means. 1933. The Modern Corporation and Private Property. New York: Macmillan.
Coase, Ronald. H. 1937. The Nature of the Firm. Economica 4 (16): 386–405.
International Monetary Fund, and Organisation for Economic Co-operation and Development. 1999. Report on the Survey of Implementation of Methodological Standards for Direct Investment. Paris: OECD, Directorate for Financial, Fiscal and Enterprise Affairs (DAFFE). http://www.oecd.org/dataoecd/40/45/2752183.pdf.
Mill, John Stuart. 1848. Principles of Political Economy. New York: D. Appleton.
Veblen, Thorstein. 1923. Absentee Ownership and Business Enterprise in Recent Times: The Case of America. New York: B. W. Huebsch.
en·ter·prise / ˈentərˌprīz/ • n. 1. a project or undertaking, typically one that is difficult or requires effort. ∎ initiative and resourcefulness: success came quickly, thanks to a mixture of talent, enterprise, and luck. 2. a business or company: a state-owned enterprise. ∎ entrepreneurial economic activity. DERIVATIVES: en·ter·pris·er n.