Innovation and Schumpeter’s Theories
In previous articles I have outlined how the usage of the term innovation has grown exponentially over the last years. You can hear it in politics, institutions, international organizations and so on. Despite this popularity, however, we can say that innovation management is still an immature “science”. There is no dominant theory on the field and little agreement among managers and academics alike regarding what affects a company’s ability to innovate.
With that in mind I decided to start a series of articles covering the most influential innovation management theories, laying down a comparative analysis where the insights gained from one theory can be used to fill the gaps of another. Throughout the series I will cover different authors (Henderson, Utterback, Teece, Tushman, Forster, Christensen, etc) and different concepts of innovation (incremental, modular, architectural, radical, product, process, market, disruptive, organizational, complementary, etc).
Schumpeter
The first part will be dedicated to the Austrian economist Joseph Schumpeter, a pioneer when we talk about innovation management. Around the 1930s Schumpeter started studying how the capitalist system was affected by market innovations. In his book “Capitalism, Socialism and Democracy” he described a process where “the opening up of new markets, foreign or domestic, and the organizational development […] illustrate the same process of industrial mutation, that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one”. He called this process “creative destruction”.
After analyzing the capitalist model Schumpeter tried to understand what companies would be in a better position to innovate. He developed a theory where a company’s ability to innovate was mainly connected to its size. Initially he defended that small companies should be in a better position due to their flexibility while large companies might get trapped in bureaucratic structures.
Some years later, however, he changed his view, stating that larger corporations with some degree of monopolistic power could have an advantage to develop innovations. Compared to smaller firms such large corporations have better resources and more market power. Unfortunately the innovation theory was only a marginal part of Schumpeter’s work, it was derived from his analysis of the different economic and social systems. The theory therefore has no empirical foundation at all, there is no strong evidence to support a relationship between the size of a company and its ability to innovate.
One important insight arising from Schumpeter ideas, though, is that innovation can be seen as “creative destruction” waves that restructure the whole market in favor of those who grasp discontinuities faster. In his own words “the problem that is usually visualized is how capitalism administers existing structures, whereas the relevant problem is how it creates and destroy them”
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Very nice write up on innovation. I am looking forward to the rest of your series. In some cases big companies have greater innovation resources because of their capital, however it matters a great deal on their heirarchy and structure. Smaller companies may have adequate resources to innovate, but lack the funding.
Yeah this is the point, you have cases where big companies are in a better position to innovate, and cases where small ones are (for a variety of reasons). Therefore one can not correlate innovativeness with size, and that is where Schumpeter’s theory fell short.
[…] In the first part of the series we have covered the Austrian economist Schumpeter and his theory that associated a company’s ability to innovate with its size (click here to read the first part). Unfortunately, as we have seen, there was no strong evidence to support such theory. This led academics over the following decades to start exploring alternative variables that could explain what companies would be in a better position to innovate and under what circumstances. In this article we will cover one of the first theories that emerged during the late 1970s, the Incremental-Radical innovation dichotomy. […]
[…] In the first part of this series we have examined one of the first academics to study innovation management: the Austrian economist Joseph Schumpeter (click here to read the first part). We have seen that there was no empirical evidence to support Schumpeter’s theories that associated a company’s ability to innovate with its size. In the following decades many authors started exploring other factors that could possibly explain why some firms were very good dealing with innovation while others failed miserably. […]
[…] In the first three parts of the series we have covered three static models of the innovation management theory: Schumpeter, the Incremental – Radical dichotomy and the Henderson - Clark model (if you have not you can click here to read part 1, part 2 or part 3). […]
[…] So far we have already covered three models that analyse what companies will be in a better position to innovate and under what circumstances (Schumpeter, the Incremental – Radical dichotomy and the Henderson – Clark model) and one framework that outlines the introduction, growth and maturation of innovations and technological cycles (the S-Curve framework). In the fifth part of the series I will present the Teece model, which can be used to predict who will profit from an innovation and to understand what company will have higher incentives to invest in certain innovations. […]
[…] Innovation and Schumpeter’s Theories […]
Luogo interessante, buon disegno, lo gradisco, signore! =)
[…] Ron Paul’s response was based on, according to him, the Austrian business cycle theory (ABCT). Most Austrians would probably agree that there is no one common ABCT, but that there are different strands of ABCT. From what I understood, Ron Paul subscribes to the theory offered by Joseph Schumpeter, an Austrian economist. Schumpeter’s version of business cycle theory is just one strand of ABCT and most Austrian scholars do not even consider him an Austrian scholar. […]