Management of Innovation: Schumpeter's Theory of Economic Development - Research Paper Example

Introduction The tight competition in the global market is pressuring a lot of domestic and international businesses to innovate new products with the use of technology. Because of the major geographical shift of resources within the global markets, innovation is considered one of the most significant models in the study of the new industrial order1 (Kodama 1995, 1). Japan is one of the few countries that has successfully established a unique socio-economic system that contributes to the development of high technology innovation (Kodama 1995, 3). Likewise, the manufacturing firms in India has also been facing a varitey of technology related challenges over the past few decades2 (Basant and Chandra 2002). In relation to the importance of emerging techno-paradigm and response to the rapid global technological changes, international organizations like the World Bank, OECD, and NIS has been extending its support towards the improvements of the National Innovation Systems3 not only within the micro levels like the national, regional, and sectoral area but also within the macro levels4 (Cimoli and della Giusta 1988). For many years, Joseph Schumpeter spent his life observing how people became rich at the expense of the poor individuals who live their lives in poverty. This gave him the idea behind the formation of Schumpeter’s Theory of Economic Development. Well-known in Europe, Japan, and in the United States, Schumpeter studied the impact of capitalism within the economic system during the modern twentieth century5 (McCraw 2007, 11). To enable the readers have a better understanding the micro foundation of technology, Schumpeter’s Theory of Economic Development will first be tackled in this study followed by going through the innovation patterns of technology as explained by Kodama. With the use of Schumpeter’s five types of innovation in defining the act of entrepreneurship, a total of five modern examples of innovation will be provided in the study. Innovation Patterns of Technology With regards to the existing patterns of technology innovation, Kodama (1995) explained that the shift in the techno-paradigm in manufacturing companies was made possible through a series of product development. In line with this, factors such as the changing demand in the market, tight competition in the R&D, and the emerging diversification of products equally contributes to the changing demands on manufacturing companies6 (Kodama 1995, 9). Because of the need for more product and technology innovation, R&D in manufacturing companies were left with no other choice but to fuse or combine the different existing technologies with the purpose of developing a series of technical breakthroughs7 (Kodama 1995, 9). It simply means that it is through the process of continuous fusion of available technology that enables most R&D come up with new innovations in technology. Schumpeter’s Theory of Economic Development The model of Schumpeter focused on studying “routine behaviour and the innovative overcoming of this behaviour at the levels of individuals, organizations, economic systems, and broader socio-economic systems”8 (Andersen 2006, 2). In his later version of corporate research and development (R&D) and production, Schumpeter decided to point-out the relation running from the science-base explanations from firms to markets using the demand-pull model9 (Cimoli and della Giusta 1988). The same idea was provided by Kodama (1995) such that the key issue behind the policy on technology is focus on how we can make it possible to make use of technology in order to uplift our living standards and that technology policy is now being dictated by the demand side rather than the previous belief that supply side controls the development of technology10 (Kodama 1995, 8). As a result of the development of Schumpeter’s work including the contributions of Rosenberg’s work in terms of understanding the concept of learning in production, the model of technological change became much more complex. With this, R&D labs are now considered as significant providers of inputs for learning in production. Since R&D is the receivers of technological inputs in the form of problems that has arise out of production, R&D labs are seen as the locus where technical change primarily occurs11 (Andersen 2006). Similar to the point-of-views of Schumpeter and Rosenberg, Kodama (1995) also acknowledges the significant changes in the R&D activities which focus on generating high technology and product development processes that could lead to the improvements of technology in the global markets12 (Kodama 1995, 4). Real-Case and Modern Examples of Schumpeterian Innovation In general, the ability of a company to product new and cheap product during the early stage in business cycle enables the firm to earn more profit13 (Federal Reserve Bank of Dallas 2001). Since the mid-1990s, a lot of multinational companies have been investing large sum of money on R&D in order to develop new products that could capture the interest of the consumers. Introduction of a New Product A good modern example of the introduction of a new good wherein the target consumers are not yet familiar is the case of Perpetual Water which is based in Australia. The company spent millions of dollars on its R&D to develop a large-scale water purifier for residential and commercial use. In line with this, the newly innovated product purifies the available grey water through purification process which includes absorption, filtration, and multiple disinfection barriers14 (Sustained 2010). With regards to the need to invest on new products and processes, Schackle and Schumpeter stated that investment in new products and processes has elements of true uncertainty15 (Freeman and Perez 1988, 43). It only means that the introduction of a new product may not necessarily be effective in terms of creating new demand for the said product. In line with this, failure of a business organization to capture the interest and support of the company’s target consumers in patronizing the newly introduced product in the market could negatively affect the financial standing of the company. Therefore, Schackle and Schumpeter strongly suggest the need to carefully study the risks and uncertainties lies behind the investment on new product16. Introduction of a New Method of Production The introduction of a new method of production that is not yet tested by experience in the branch of manufacturing companies can also significantly improve the company’s profitability and market share. Aiming to solve the public concerns about the long-term availability of fossil fuel, James Liao together with Shota Atsumi and Taizo Hanai has recently introduced a new production process for biofuels17 (Food and Fuel America 2008). As soon as the production procedure has been perfected, innovator of the new production process can easily apply for their intellectual property rights which could provide them with the opportunity to gain a large amount of profit out of developing the new technology. In relation to the introduction of new product in the market, Schackle and Schumpeter has the same opinion when it comes to the investment or introduction of new method of production in the market such that the inability of the business to create demand for the said technology could only result to more financial problems on the part of the company18 (Freeman and Perez 1988, 43). Opening of a New Market Aside from innovating a new product and technology, opening of a new market is another technique behind a company’s success. In general, improvement in technology is one of the main reasons for opening a new market. During the past decades, cell-phone technology has strongly made a strong impact in the market during the modern days. During the first few years cell-phone was introduced in the market, the market price for each unit was as high as US$3,000 on top of the monthly subscription19 (Rogers 2003). Back then, the first manufacturers of cell-phone products were able to easily earn large amount of profit. Because of the significant increase in the supply of cell-phones, the low-end consumers can now easily purchase a cell-phone at a very low price. New Sources of Supply of Affordable Raw Materials Considering the tight competition in the market today, it becomes one of the main challenges for the local and international manufacturers to be able to locate for a new source of supply of raw materials at a very affordable price. Basically, the ability of each company to search for new sources of raw materials enables their businesses to offer their products at a more attractive price. By doing so, the company could effectively compete in the market. For instance: Malaysia is one of the world-class exporters of high quality rattan-made furniture including home décor items20 (One2furniure 2010; Rinaat Cane 2010). For this reason, IKEA which is one of the biggest international retailers of affordable furniture products such as economically designed bed, tables, chairs, vase, plates, and wall shelves among others21 (IKEA 2010) import some of its items from Malaysia. Since IKEA orders rattan-made furniture from few main sources in Malaysia, the company was able to purchase these raw materials at a very low price. That way, the company was able to enjoy the benefit of gaining more from each dollar the company is spending. In the past, a lot of large-scale companies were able to easily monopolize the U.S. market. Since Ronald Reagan became the president of the United States, the U.S. government has been strongly promoting the anti-monopoly laws and regulation in the country22 (Democrats 2005). For instance: The U.S. government has been promoting a fair market competition by allowing the qualified construction companies to bid for the public road construction23 (Semmens 1987). By doing so, the U.S. government was able to effectively break the U.S. road monopoly. Discussion Because of the significant slowdown in the global economy, there is a need to improve the technology innovation to enable the local and international businesses have a better competitive edge as compared to its competitors. Upon analyzing the entire economic situation, demand for technology follows the business cycle in such a way that technological product normally passes product growth and peak before going through recession and recovery stage. To avoid entering the recession phase, most companies that manufacture technology are being challenged to innovate new technology to avoid the recession phase (Freeman and Perez 1988, 38). I strongly agree with the explanation of Kodama (1995) such that changes in the R&D and product innovation are actually caused by the businesses’ response to the changing demand in the global markets. In relation to the business cycle, most technologically based companies are heavily relying on investing large sum of money in order to keep their R&D department ahead of its competitors. Since the first company who is able to produce a unique product has a right to apply for property and intellectual rights, large multi-national companies are spending billions of dollars on investment just to be able to get hold of new technology. This strategy would actually allow technology-based companies to have the opportunity to monopolize a given market for a specific product. Product and technology innovation is not only a way to open new business opportunities in domestic and global markets. This strategy also enables most companies who are into technology innovation to avoid facing the business consequences of going through a recession stage as shown in a typical business cycle. In line with this, the ability of most large-scale companies to make use of technology innovation as a competitive edge is one of the main reason why these companies are able to maintain the company’s profitability and market share despite the global economic crisis. Given the different situations wherein technology innovation could take place, Kodama mentioned that the shift in the techno-paradigm in manufacturing companies was made possible through a series of product development. This concept is true since R&D would normally develop a new product using either the same or a relatively new technology in order to come up with another product line. It does not matter is the company decided to make use of the same technology as long the product design has been changed by the company. Upon analyzing the celphone industry, changing the product design of an existing item is already considered as a relatively new product under the same brand name but different model code and design. This is one of the best explanations that could answer the question why products in celphone technology changes rapidly changing in the market. By developing new product design, the company is somehow creating new demand from its target customers. To avoid facing the consequences of business recession, most celphone manufacturing companies are using this particular marketing strategy as its technology innovation approach that will enable the business survive despite the global economic crisis. Conclusion Because of the tight competition in the global markets, business around the world has been focusing on technological innovation as a way of gaining a better competitive edge in the global market. As part of the rapid technological changes in the world market, most of the R&D in different companies has been trying to integrate their existing technology with another technology in order to come up with a more upgraded technology. The continuous changing demand in the market, the tight competition in the R&D industry, and the emerging diversification of products equally contributes to the changing demands on manufacturing companies. Because of the need for more product and technology innovation, R&D in manufacturing companies were left with no other choice but to fuse or combine the different existing technologies with the purpose of developing a series of technical breakthroughs. In relation to technological innovation, the modern capitalism as viewed by Schumpeter can be explained through the use of the different types of innovation strategies. There are many ways in which technology innovation can take place. In line with this, Schumpeter suggest that innovation can take place in situations wherein a new product is introduced in domestic or global markets, when a new method of production has been introduced in the market, when a business organization tries to open a new market, or when a business is outsourcing affordable raw materials from another place or country. Basically, the modern examples presented in this paper prove that the different types of innovation as proposed by Schumpeter are present in today’s economic activity. *** End *** References Andersen, Esben Sloth. "Schumpeter’s General Theory of Social Evolution: The Early Version." Paper for the Conference on Neo-Schumpeterian Economics: An Agenda for the 21st Century, Trest, Czech Republic, 27-29 June 2006. 2006. 1-17. Basant, R., and P. Chandra. "Building Technological Capabilities in a Liberalising Developing Economy: Firm Strategies and Public Policy." Economics of Innovation and New Technology, 2002: 11(6), 1-23. 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Perpetual Water Uses Innovation Grant to Save Water. 2010. http://www.sustained.com.au/index.php?option=com_content&task=view&id=695&Itemid=29 (accessed June 8, 2010). Read More