Schumpeter’s Innovation Theory

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Table of Contents

Introduction
Causal Mechanism of the Theory
Principles on which the Theory is Based
Strengths of the Theory
Limitations of the Theory
Alternative Theory
Reference List

Introduction

Schumpeter’s theory provides that the leading role of an entrepreneur in the economic field is the introduction of innovations from which the reward is gaining profits. The model stipulates that entrepreneurship plays a decisive role in fiscal development and that successful creativities are the only way to achieve such goals as financial stability within an organization. It explains that invention could occur in such ways as launching or upgrading a product, introducing new production methods, acquiring advanced supply sources, and bringing unique business structures (Sweezy, 1943).

The business approach was developed by Joseph Alois Schumpeter, an Australian political economist and foundational contributor to the topic of development and technological advancements. The idea is based on the more elaborate theory of monetary growth, which focuses on entrepreneurship and its role in industrial empowerment with innovativeness as the linkage. In this regard, Schumpeter worked towards defining and explaining the change in a perspective related to its significance in the entrepreneurial specialties.

Causal Mechanism of the Theory

The theory implies that fiscal restructuring in the capitalist commercial world is the main reason for business fluctuations or increased investments. It remains a prime force in the economy and influences the analysis of modern business developments. Introducing new products and processes plays a key role in restructuring competition among traders, thus regulating sales levels. Furthermore, it affects the creation and redistribution of business principal aspects within the gradually adjusting economic space. Schumpeter wanted to show that market influence derived from creativity would outperform the unseen price rivalry.

In terms of concepts, Schumpeter’s invention and entrepreneurship idea is essential and still evolving. He believed that technical advancement often generates temporary monopolies that make for abnormal gains, which are easily undermined by competition (Estrin et al., 2020). By impacting adjustments within the economy, innovations determine the direction taken by business institutions and nations. The analysis in terms of macro-level theories is underpinned by its relative effect of development on organizations’ profit achievements. In this way, it helps predict the steps that can be taken to stabilize their overall business gain, thus limiting fluctuation in their transaction.

Principles on which the Theory is Based

Schumpeter applied principles, which are the foundation for the change postulation. First, he based it on the code of entrepreneurial innovations, which leads to material growth when successfully established. He bases it on a circular flow system that runs through the same channels despite principle structure changes. The theory has evolved since changes in design and the development of new products and processes have occurred. Innovation is no longer based on individual identities but instead on the involvement of various actors. This necessitates cognitive skills that maximize the dissemination of creativity and, thus, the perception of transformation that leads to entrepreneurship (Cozzi et al., 2021).

Previously, a firm’s ability to engage in routine innovations is majorly dependent on the market power a firm poses. Schumpeter assumed that the economy is constant and does not undergo fluctuations. He believed that the firms working in a system are in an equilibrium competitive state.

Strengths of the Theory

Innovation is the engine that drives economic development in an economy. Entrepreneurs, through inventions, bring new insights to the business world, leading to diversification. The innovators assist in creating a favorable market structure that promotes sales, thus increasing profitability. The theory insinuates that adjustments in investments are not entirely independent of capital and the firm’s innovativeness. Business upheaval is no longer generated by a single individual but by the combined effort and cooperation of many actors aiming to bridge a business gap.

It offers new explanations about the positive and negative effects of inventions, which is critical in determining a business plan’s future. Innovations may also negatively influence a firm following that when firms try to adapt to new trends, they invest heavily to outsmart their competitors. Still, when the new fields are over-flocked, it backfires on them, leading to impeccable losses (Śledzik, 2013). Schumpeter changed an entrepreneur’s view as just the organizer and production manager into any party that revolutionizes production.

Limitations of the Theory

Despite being accepted and applied in the modern economy, the theory has shortcomings and suffers the following criticisms; It is difficult and impractical to undertake an empirical assessment of Schumpeter’s reorganization theory because his arguments are based chiefly on sociological than monetary considerations. Schumpeter’s approach is fundamentally similar to the over-spending approach. The main difference in the theory is the source of volatility in investment when the economy is steady. This hypothesis often ignores other causes that affect variations in fiscal activity. Change is not the only factor that causes socio-economic fluctuations; it is only one amongst many.

Given that Schumpeter’s economic growth theory avails a vivid analysis of the theory’s concept, it is required to critique the innovative socio-economic industry (Śledzik, 2013). The type of empirical phenomena to which the theory applies is skewed toward broader ventures with a competitive outlook on potential demands and competing in growing markets. Although it has such limitations, the theory is still quite effective in determining pecuniary fluctuations.

Alternative Theory

The proposed general theory of innovation and innovativeness’ was created by Dennis Stauffer. It describes the model as a cycle in which a source of potential possibilities is investigated and evaluated to see how they perform and, if so, whether an attempted invention has any effect and generates value, allowing for fresh insights. Innovation has cycles that propel it while others object to it; thus, treating innovation as just another business process is misguided. This model is intended to evaluate innovativeness across various disciplines, and environments, not only as a business activity or an economic pattern.

Dennis Stauffer’s proposed general theory of innovation and innovativeness provides an explanation that proves the urgency of understanding and applying the innovation concept in business firms (Stauffer, 2015). Aspects of this concept, such as the innovation cycle being a distinguishing feature of complex adaptive systems or the fact that this cycle offers a valuable distinction between two types of complex adaptive systems, still need further investigation.

Reference List

Cozzi, G., Pataracchia, B., Pfeiffer, P. and Ratto, M. (2021) ‘How much Keynes and how much Schumpeter?’, European Economic Review, 133(1), pp. 1-11. Web.

Estrin, S., Korosteleva, J. and Mickiewicz, T. (2020) ‘Schumpeterian entry: innovation, exporting, and growth aspirations of entrepreneurs‘, Entrepreneurship Theory and Practice, p. 104. Web.

Śledzik, K. (2013) ‘Schumpeter’s view on innovation and entrepreneurship: management trends in theory and practice’, University of Zilina & Institute of Management, pp. 89-95. Web.

Stauffer, D. (2015) ‘Valuable novelty: a proposed general theory of innovation and innovativeness’, International Journal of Innovation Science, 7(3), pp. 169-182. Web.

Sweezy, P. (1943) ‘Professor Schumpeter’s theory of innovation’.The Review of Economics and Statistics, 25(1), pp. 93-96. Web.

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