THE INNOVATION

THEORY OF JOSEPH
SCHUMPETER
Joseph Alois Schumpeter (1883 -
1950)

An economist and regarded as one

of the 20th century's greatest
intellectuals.

He is best known for his theories

on business cycles and capitalist
development and for introducing
the concept of entrepreneurship.
What is Schumpeter theory of entrepreneurship?
The innovative theory is one of the most famous theories of
entrepreneurship used all around the world. The theory was advanced
by one famous scholar, Schumpeter in 1991.
Schumpeter believes that creativity or innovation is the key factor in
any entrepreneur’s field of specialization. He argued that knowledge
can only go a long way in helping an entrepreneur to become
successful. He believed development as consisting of a process which
involved reformation on various equipment’s of productions, outputs,
marketing and industrial organizations.
However, Schumpeter viewed innovation along with knowledge as the
main catalysts of successful entrepreneurship. He believed that
creativity was necessary if an entrepreneur was to accumulate a lot of
profits in a heavily competitive market
The concept of innovation and its corollary
development embraces five functions:
■ Introduction of a new good
■ Introduction of a new method of production
■ Opening of a new market
■ Conquest of a new source of supply of raw materials and
■ Carrying out of a new organization of any industry
According to Schumpeter:
■ Development is not an automatic process; but must be deliberately
and actively promoted by some agency within the system.
Schumpeter called the agent who initiates the above as
entrepreneur
■ He is the agent who provides economic leadership that changes the
initial conditions of the economy and causes discontinuous
dynamic changes
■ By nature he is neither technician, nor a financier but he is
considered an innovator
■ Entrepreneurship is not a profession or a permanent occupation
and therefore, it cannot formulate a social class like capitalist
■ Psychological, entrepreneurs are not solely motivated by profit
Features of Schumpeter Theory
■ High degree of risk and uncertainty in
Schumpeterian World
■ Highly motivated and talented individual
■ Profit is merely a part of objectives of
entrepreneurs
■ Progress under capitalism is much slower than
actually it is
■ It is leadership rather than ownership which
matters.
 Three types of Innovation
1. Product Innovation
• Product innovation is defined as the development of
new products, changes in design of
established products, or use of new materials or
components in the manufacture of
established products. Numerous examples of product
innovation include introducing new products, enhanced
quality and improving its overall performance .
2. Process Innovation
• Process innovation is probably the least sexy form of
innovation. Process is the combination of facilities, skills,
and technologies used to produce, deliver, and support a
product or provide a service. Within these broad
categories, there are countless ways process can improve.
The example of this is One of the most famous and
groundbreaking. The examples of process innovation is
Henry Ford's invention of the world's first moving assembly
line. This process change not only simplified vehicle
assembly but shortened the time necessary to produce a
single vehicle from 12 hours to 90 minutes.
3. Business Model Innovation
• Business model innovation is probably the most challenging of the
innovation types as it will likely present an organization with major
requirements for change. Often, the very capabilities or processes
that have been optimized to make a company successful and
profitable will become the targets for transformation. In some
cases, these changes can threaten elements of the company
identity and come into conflict with brand expectations or promises