Economic Theory and Technological Change - Term Paper Example

Economic Theory and Technological Change In daily conversation, the terms invention and innovation are often used interchangeably. However, there are important distinctions between these terms which give each term a unique meaning. Invention is about discovery and the creation of something novel that did not previously exist. Innovation, on the other hand, carries invention further with the commercial realization of the value of the invention or the receipt of an economic return. Thus, patents, the legal protection of an idea reveals an invention while, the marketing and consumer acceptance of a new product is evidence of an innovation. Commercialization is the process that turns an invention into innovation (Feldman, 2004). The specific characteristics of innovation are defined as follows: (1) It is unforeseeable. (2) It presumes the appearance of a new type of individual possessing special qualities. (3) It requires the creation of new firms. (4) There is no linkage that can connect it to the situation that would have existed in its absence. (5) It is distinct from invention, and the innovator can be distinguished from the inventor. The following are the different kinds of innovation: (1) Radical Innovation: Radical innovation offers a technical leap such as: printing as opposed to monks writing books long-hand electric light over candles flying in planes as opposed to travelling overland solar energy instead of fossil fuels Direct Line has changed the face of the insurance industry by selling cheaper insurance direct to the customer, forcing most other large insurance firms to follow their lead. (2) Incremental Innovation: Incremental innovation builds on what has gone before such as: people carriers and the Model T Ford car a Boeing jet and the Wright brothers bi-plane a digital colour TV as opposed to a black and white analogue set The vast majority of innovations come from incremental improvements. (3) Technology Fusion: Technology fusion combines several different technologies. It is common in the electronics industry. For example, the cellular phone is now a personal organizer, a still and video camera too. (4) Technology Push versus Market Pull: Innovation can be driven by new technological development or customer demand. Many new products arise from attempts to meet market demand than from new technologies. The technological breakthrough of the laser has led to various innovative applications of this technology, for example in keyhole surgery and laser-correction of poor eyesight. Windscreen-wipers used no new technology at all. They just met the market need for clean windows while driving (Different Kinds of Innovation). (5) Product Innovation versus Process Innovation: When most people think of corporate innovation, they think of product innovation which involves launching of a new product. Even a small improvement in a product can help keep a company one step ahead of its competitors. Process innovation may sound comparatively dull, but is extremely important. In any large company, lots of people are involved in internal processes that allow the company to run smoothly and legally. These are the people in middle management, human resources, accounting, finance, administration, and the like. In general, they recognize processes that do not work well and have ideas about how to make those processes more efficient (The Four Kinds of Corporate Innovation). The economist Joseph Schumpeter’s major contribution of the economic vision of innovation has helped strengthen the theoretical base of one area of strategic management, that is, innovation strategy and innovation management within the enterprise. His theories are interesting also because they make a useful contribution to the multidisciplinary study (economics and management) of innovation. While certain orthodox economists may perhaps doubt the relevance of the evolutionary approach to innovation, all economists would agree that Joseph Schumpeter has made an important contribution to the analysis of innovation. Two main concepts are at the centre of the analyses presented by Schumpeter. The first is the concept of circular flow and the second, that of development. From the perspective of the circular flow, agents intervening in production do with using pre-existing combinations of factors; they are merely “operators” in the Schumpeterian sense of the term. The second concept, development, calls for the implementation of innovations, new combinations, which pull the economy out of the circular flow. Thus, innovation is central to Schumpeter’s vision and his conception of enterprise’s strategy. Development results from the carrying out of “new combinations,” which covers the following five cases: (1) The introduction of a new good. (2) The introduction of a new method of production. (3) The opening of a new market. (4) The conquest of a new source of supply of raw materials. (5) The carrying out of a new organization. It is precisely the creation of this new combination which characterizes the “enterprise” in the Schumpeterian sense, and the specific function of the entrepreneur. The entrepreneur increasingly manages and creates the tastes and needs of the consumer. These tastes and needs, in the last stage of the evolution of the market economy, are an element of production that is more determined than determinant. Schumpeter derives his vision of the entrepreneur or business leader from the notion that in all areas of social activity, the leader has a specific role. The aptitudes of this leader essentially amount to initiative and will. This notion was transposed to the economic field by Schumpeter, thus deriving the notion the notion of enterprise and entrepreneur. The enterprise is the act of carrying out the new combinations of productive factors and the entrepreneur is the agent whose function it is to carry them out. For Schumpeter, the entrepreneur is not the inventor who makes a discovery but rather the innovator, that is, the one who will introduce this discovery into the enterprise, industry, and economy – the one who is, strictly speaking, responsible for the innovation. The specific function of the Schumpeterian entrepreneur is to innovate and in doing so, to overcome a whole set of resistances. This entrepreneur is not the one who assumes the risks; contrary to what has been said by many modern theorists, the Schumpeterian entrepreneur is not a “risk-taker.” It is precisely on this point that many criticisms are levelled at Schumpeter. As per many, the most serious deficiency of Schumpeter’s model is that it does not include a risk-taking agent. Although Schumpeter distinguishes between the entrepreneur and the operator, the boundaries between them are not always clear. Schumpeter’s justification was that nobody ever is an entrepreneur all the time, and nobody can ever be only an entrepreneur. A man who carries out a “new combination” will unavoidably have to perform current non-entrepreneurial work in the course of doing so. The main interest of Schumpeter’s work as it relates to the enterprise and innovation is precisely that Schumpeter makes way for a true strategy for the enterprise and entrepreneur, a strategy centred on innovation. While orthodox economic theory views the enterprise and its action as the result of the inanimate forces of supply and demand, and innovation as “black box”, and invisible process during which inputs are simply transformed into outputs, Schumpeter offers economists and managers a more strategic vision of innovation and the role of entrepreneur (Tremblay, 2004). Bibliography Feldman Maryann (2004) The Significance of Innovation, [Online], Available: http://www.competeprosper.ca/images/uploads/Feldman_WIM_Summary_2005.pdf [19 May 2009] Different Kinds of Innovation, [Online], Available: http://www.creativityincubator.com/showModule.php?module=61&category=10 [19 May 2009] The Four Kinds of Corporate Innovation, [Online], Available: http://www.jpb.com/creative/article_4kinds_corp_innovation.php [19 May 2009] Tremblay Diane-Gabrielle (2004) Innovation, Strategic Management and Economics, [Online], Available: http://www.teluq.uquebec.ca/chaireecosavoir/pdf/NRC04-04A.pdf [19 May 2009] Read More