Schumpeter's Theory of Innovation

SCHUMPETER’S THEORY OF
INNOVATION
PRESENTED BY-
• LAKHYAJIT NEOG
• ABHIJIT SAIKIA
• ANANTA J HAZARIKA
• KARAN MAHATO
• KALPA SAIKIA
CONTENTS
 INTRODUCTION
 THE THEORY OF INNOVATION
 DIFFERENCE BETWEEN INVENTION AND INNOVATION
 DRAWBACKS
 CONCLUSION.
Joseph Schumpeter
 Schumpeter was born in Austria in 1883 and learned economics from the progenitors of
the Austrian school tradition, including Friedrich von Wieser and Eugen von Bohm-
Bawerk. Over his many years in public life, Schumpeter developed informal rivalries
with the other great thinkers of the west, including John Maynard Keynes, Irving Fisher,
Ludwig von Mises and F.A. Hayek. Schumpeter moved to the United States in 1932 to
teach at Harvard, and in 1947, became the first immigrant to be elected president of
the American Economic Association
The theory of innovation
 Economic development of any region is an outcome of purposeful human

activity. Men assumes various roles in the development process. He stands at
the center of the whole process of economic development.
 According to Schumpeter, economic development consists of “employing
resources in a different way, bringing in a new combination of means of
production”. The entrepreneurs look for ideas and put them into effect for
economic development.
 Entrepreneur is a Schumpeterian innovator and something more than a leader.
The entrepreneur according to him, occupies a crucial place in the process of
economic development.
 Joseph A Schumpeter for the first time put the human agent at the center of
the process of economic development and assigned a critical role in his theory
of economic development.
 Schumpeter said, “Entrepreneurship is essentially a creative activity
or an innovative function.”
 The process of innovation may be in the form of-
 Introduction of a new product or a new species of already known product
 Use of new method of production
 Opening a new market
 The conquest of a new source of supplying raw material or semi finished
goods
 A new form of organization
DIFFERENCE BETWEEN INVENTION AND INNOVATION
BASIS FOR COMPARISON INVENTION INNOVATION

Meaning Invention refers to the Innovation implies the
occurrence of an idea for a implementation of idea for
product or process that has product or process for the
never been made before. very first time.
What is it? Creation of a new product. Adding value to something

already existing.
Concept An original idea and its Practical implementation of
working in theory. new idea.
Skills required Scientific skills Set of marketing, technical
and strategic skills.
Occurs when New idea strikes a scientist. A need is felt for a product
or improvement in existing
product.
Concerned with Single product or process. Combination of various
products and process.
Activities Limited to R & D Spread across the
department. organization.
• Schumpeter depicted an entrepreneur not only a premier agent of production who
brings together all factor of production but also provides a sound management
and control for the survival as well as growth of the production unit.
• Schumpeter says that the economic growth depends on the rate of applied
technical progress in the economic field which in turn depends on the supply of
entrepreneurs in the society. Thus the entrepreneur is the agent of change in
society.
• In the Schumpeterian model, entrepreneur is an innovator, and the existence of

“innovative entrepreneur” depends on the necessary social and economic
overheads. These economic and social overheads are very poor in the backward
regions which cause a short supply of entrepreneurs.
Further, the continuation of an enterprise depends on innovation. In this
competitive world, which is evolving in a daily basis, innovation is a must. Without
new products, without innovative ideas about existing products – to make them
better, the way of selling them and other innovative areas the enterprise will
succumb in the race with other enterprises. So, the entrepreneur must innovate,
should think and utilize the various innovative ideas to keep on doing business, to
gain more profit and to grow and expand the business.
The Schumpeter’s theory of innovation
suffers from the following criticisms:
 It is not only difficult but also unavailing to perform the objective evaluation of Schumpeter’s theory of
the business cycle because its arguments are more based on the sociological factors rather than the
economic factors.
 Schumpeter’s theory is not basically different from the over-investment theory; it differs only in the
respect of the cause of variation in investment when the economy is in stable equilibrium.
 Like other theories of the business cycle, this theory also leaves out other factors that cause fluctuations
in the economic activities. Innovation is not the sole factor, rather is only one of the factors that cause
fluctuations in the economy.
In spite of these shortcomings Schumpeter’s theory of innovation is widely acceptable in the modern economy
and is used to determine the economic fluctuations.

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What is Schumpeter's theory of innovation?

What is the difference between invention and innovation according to Schumpeter?

SCHUMPETER’S THEORY OF

 Economic development of any region is an outcome of purposeful human

BASIS FOR COMPARISON INVENTION INNOVATION

What is it? Creation of a new product. Adding value to something

• In the Schumpeterian model, entrepreneur is an innovator, and the existence of

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