Schumpeter's Theory




Schumpter’s theory of Innovation:

              Schumpeter’s theory of entrepreneurship is a pioneering work of economic development. Development, in this sense, implies that carrying out of new combinations of entrepreneurship is basically a creative activity. According to Schumpeter, an entrepreneur is one who perceives the opportunities to innovate, ie, to carry out new combinations or enterprise. Innovation involves problem of new combination leading to innovation covers the following five cases;

  1. The introduction of new goods that is the one with which consumers are not yet familiar, of a new quality.
  2. The introduction of new method of production, that is yet to be tested by experience in the branch of manufacture concerned which need, of means, to be founded upon a scientifically new discovery & can also exist in a new way of handling a commodity commercially.
  3. The opening of a new market that is a market into which the particular branch of manufacture of the country has not previously entered, whether or not this market has existed before.
  4. The conquest of a new source of supply of a raw material or semi-manufactured goods, again irrespective of whether this source already exists or whether it has first to be created.
  5. The carrying out of the new organization of any industry like the creation of monopoly position through fructification or breaking up of a monopoly position.


            The carrying out of the above-mentioned combination s, Schumpeter calls enterprise & the individual who carries them is called entrepreneur.


             Entrepreneurs are motivated intellectual class of people & the prime movers of economic development. They foresee the potential opportunity & constantly try to exploit it. They are distinguished from rest of the population in use of their latent capacity to perceive & mobilize resources. Thus, one of the most important functions of an entrepreneur is to mobilize such resources which are known as 5Ms in modern management, ie, man, material, money, machine and method etc. can be properly coordinated by the entrepreneur to maximize profit from his own venture thereby leading to economic growth. The entrepreneurial activity represents a break from the routine or a circular flow or a tendency equilibrium.


          The Schumpeterian theory of entrepreneurship gives too much emphasis on innovation. It excludes the risk taking & organizing aspects of entrepreneurship which are equally important from the point of view of building enterprise. Schumpeterian entrepreneurs are large scale businessmen who introduce new technology, methods of production, etc. But in underdeveloped countries entrepreneurs who start their business generally do not have a large scale business enterprise in the beginning. According to him, an individual is an entrepreneur only when he tries new combinations to produce new things & to innovate. This view of Schumpeter is quite unrealistic & questionable.


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