Business and Marketing / Economics Essay


Schumpeter’s Theory of Innovation

Joseph Schumpeter is referred to as one of the greatest economists of all time in the first part of the twentieth century. Schumpeter’s Theory of Innovation is one of his extraordinary contributions to Economics, (Hanush and Pyka, 2007). His contribution was based on the distinct role innovations played in economic growth. Although he was the first person to develop the concepts of this theory, his point of view about the theory of innovation changed over time.

The term, innovation, simply means the creation of something new. Innovativeness involves adopting the new creation or method in the cultural, administrative, and social medium. When innovativeness is adopted, it can be expressed as a function of entrepreneurship. Innovation is a process and a product in which access is made new and such innovations arise as a result of technological change, (Karagöz and Albeni, 2003). Innovation can be defined as a new thinking way which produces a new way of making things, and the actions of trying out what has been created and utilizing it for social and economic activities.

The term innovation meant something unusual since the late 1880s but none of the fore-runners of the term innovation have been as effective as Schumpeter. In his assessment, consumer preferences don’t happen spontaneously because they are already given; this means that consumer preferences cannot be the cause of economic change. Although, the consumers partaking in the process of economic development have a passive role to play. He went further to define economic development as a historical process that undergoes structural changes which are extensively driven by innovation and he divided the process into four types;

·     The launch of a new product or a new kind of already existing or known product.

·     The adoption of new techniques for production and product sales.

·     The opening of a new market in which the industry’s branch is yet to be represented.

·     Acquisition of new means of supply of raw materials or semi-finished goods.

·     Annihilation of monopoly.

He postulated that anybody in search of profits must innovate. This will lead to diverse employment of the existent economic system supply of productive means. He examined that innovation was a driving tool of competition and economic dynamics.

He believed that the center of economic change is the innovation which leads to violent storms of creative destruction. He created the term 'creative destruction' in Socialism, capitalism, and democracy. He defined innovation has an industrial mutation process that constantly changes the economic structure from within, incessantly shatters the old one, and constantly constructs a new one.

He defined economic development as a process of structural changes which was extensively driven by innovation. The process of innovation was classified into four different aspects. These aspects include;

·     Invention: The creation of new ideas that can be adopted in the economy. 

·     Innovation: Conversion of new ideas into marketable products. This stage is determined by technological and economic conditions.

·     Diffusion: This is the stage where the conversion of the new ideas into products is spread out into the potential market.

·     Imitation.

In his assessment, he positioned the dynamic entrepreneur in the middle. He posited that the activity and possibility of entrepreneurs who draw upon the scientists and inventors' discoveries produce an entirely new opportunity for employment, investment, and growth. He analyzed that the stage of the invention on the basic innovation will have less influence, however, the diffusion and imitation stage have a greater impact on the state of the economy.

In his analysis, he believed that the discovery of the diffusion of basic innovation was what mattered in terms of employment, investment, and economic growth. The diffusion of basic innovation occurs when imitators start to actualize the profitable potential of a new product or a process and begin to invest in that technology.

He referred to innovation as creative destruction which leads to economic development in which the entrepreneur carries out the change creator's operations. In his work, he defined an entrepreneur as performing innovations as a single operation which is elemental in history.

As an entrepreneur, there are some characters that should be displayed. These characters include; energy, intelligence, determination, and alertness. He further explained that entrepreneurship is innovation and also the realization of innovation. He asserted that entrepreneurship should not be confused with the four complementary functions of the invention which include; correction of an error, administration, risk-taking, and distinctive and non-entrepreneurial in nature.

Development of a Model

He developed two stages of a model which are the first and second approximations. The first approximation analyses the primary influence of innovatory knowledge. This stage assumes that the economic system is in equilibrium while involuntary unemployment is non-existent. The firm's marginal cost is in equilibrium with its marginal revenue and price. Because of the complete equilibrium in the economy, the firm can decide to take up new methods of production.

The second approximation lays emphasis on subsequent responses that are gotten from the adoptions of the innovations. It is also known as secondary approximations.

Schumpeter’s theory of innovation highlighted the phrase ‘creative destruction’ which expressed his views on capitalism as an evolutionary process based on technological firms, innovations, and creations. This process is referred to as destruction because old and older sectors and technologies will be selected/removed.

Schumpeter’s theory of innovation examined a cyclical process which was a result of the innovation in an organization, including commercial and industrial. He also referred to innovation as the changes in the techniques of the creation of a new product, the changes in industrial organization, the opening of a new market, etc. in summary, innovation means the commercial adoption of new technology, new energy sources, and new materials.

His theory suffers from some criticism such as the similarity of his theory with the over-investment theory. His theory only differs with respect to the cause of variation in investment in a stable economy.


Hanush, H., and Pyka, A., (2007). Elgar Companion to Neo-Schumpeterian Economics, Edward Elgar, Cheltenham, p. 857

Karagöz, M. and Albeni, M. (2003). Ekonomik Kalkınma ve Modern Yenilik Teorisi, Süleyman Demirel Üniversitesi İİBF, s.3, S.27-48.

Schumpeter, J.A. (1934). The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business cycle, Harvard Economic Studies. Vol. 46. Cambridge, Massachusetts: Harvard College.

ŚledzikSchumpeter’s Theory of Innovation, K. (2013). Schumpeter’s View on Innovation and Entrepreneurship. SSRN Electronic Journal. 10.2139/ssrn.2257783.

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