Schumpeter’s Theory of Innovation (1934)

Even though Schumpeter’s Theory of Innovation is from 1934, it is  a foundational concept  in entrepreneurship.

Schumpeter identified five types of innovation:-

Product Innovation: Introduction of a new product or significant improvement of an existing product.

Process Innovation: New methods or improvements in production that increase efficiency or reduce costs.

New Markets: Opening up of new markets for products that were previously unavailable or undeveloped.

Supply Source Innovation: Discovery or development of new sources for raw materials or resources.

Organisational Innovation: New organisational structures, such as more efficient management or new ways of structuring business activities.

 Schumpeter saw entrepreneurs as agents of innovation; by introducing new products and processes, entrepreneurs enable industries to evolve and adapt. Schumpeter referred to this as “Creative Destruction”, where old industries are replaced by more efficient new ones. 

This disruption leads to a reallocation of resources and capital to more efficient and productive uses.

Today, Uber and Amazon are examples of creative destruction through their transformative impact in their industries.

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McCraw, T.K., 2007. Prophet of Innovation: Joseph Schumpeter and Creative Destruction. Cambridge, MA: Harvard University Press.

Schumpeter, J.A., 1934. The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle. Cambridge, MA: Harvard University Press.