5. SHUMPETER’ CONTRIBUTION TO GROWTH ECONOMICS POLITICAL ECONOMY OF GROWTH SECS-P01, CFU 9 Finance and Development academic year 2016-17 5. SHUMPETER’ CONTRIBUTION TO GROWTH ECONOMICS Roberto Pasca di Magliano Fondazione Roma Sapienza-Cooperazione Internazionale roberto.pasca@uniroma1.it

Joseph Alois Schumpeter introduction At the beginning of the 20th century, the dominant doctrine was the neoclassical economics Marshall, British economist at Cambridge, had great influence on the development of economic thought with theories of costs, value, and distribution and developed a concept of marginal utility. His book Principles of Economics from the year 1890. Joseph Alois Schumpeter, a member of the German Historical School, developed his idea concerning the role of the entrepreneurship and started his academic career in Vienna. Publishing Theory of Economic Development in 1934 in which: tried to introduce the entrepreneurs’ role into the neoclassical economics. distinguish innovation as the function of the entrepreneur. Schumpeter has been mentioned as the father of entrepreneurship and of growth theories.

Schumpeter main issues Innovation are function of the entrepreneur activity. Multinationals role (MNCs) as powerful players in the global markets mainly in commodities Radical innovation in the production process are needed to expand enterprises and to improve behaviour Entrepreneur: as innovator, creates profit opportunities by devising a new product, a production process or a marketing strategy but not define what an entrepreneur looks like. They create innovations in the face of competition and thereby generate (irregular) economic growth

Schumpeter role of the entrepreneurs Innovations are considered as the major driver of an economy Since the social returns of innovations exceed the private returns the factors innovativeness is considered crucial aspect to policy makers in any of market economies. Entrepreneur is motivated by the temporary monopoly profit that is the return on the entrepreneur of the innovation that leads to increased productivity and is the fundamental source of wealth in a society. Distinction between invention -> an idea made manifest, and innovation -> ideas applied successfully in practice. The key to innovativeness is to allow firms to appropriate more of the social benefits of their new products or processes through intellectual property rights or relaxing post-innovation

Schumpeter distribution of innovation Innovations are not continuously distributed in time, but proceeds by leaps which upset the existing equilibrium in markets and generate (irregular) economic growth Innovative transformation are a relatively slow and conflict-ridden process and therefore innovation are defined as the function of entrepreneur that is separate from the administrative function of manager Cycle’s fluctuations are caused by supply shifts based on uneven technological changes

Schumpeter innovation and competiveness Entrepreneurs create radical innovations in the face of competition. His notion has been generally accepted. In Schumpeter’s economic system, business cycles waves are the major catalyst of economic growth. Typology of business cycles are proposed according to their periodicity, so that a number of particular cycles were named after they are discovered Although Schumpeter’s theory of business cycles is difficult to apply to the global economy, there is no doubt that the ongoing technology revolution will impact on the global markets

Schumpeter evidence on the role of technological progress Comparing the growth of GNP with R&D statistics, it can be noticed that since the chock of the oil crisis in the mid 1970s the growth of R&D expenditures in the industrialized countries has been approximately double higher than the growth of GNPs. This trend has accelerated during the two decades of globalization, the 1990s and the 2000s. The revolution of information technology (ICT) was the major source of Schumpeterian dynamics in the industrialized countries in the 1990s.

Schumpeter creation vs destruction: evidence In the early 90s, Finland was hit by serious crisis in the bank industry and about 20% of the firm population was lost. During the crisis the positive entrepreneurial event was the unexpected global success of Nokia. Two decades later Nokia is in a crisis shown a new kind of creative destruction of today. In the EU crisis countries (Greece, Italy, Spain, Portugal and Ireland) the Schumpeterian market chock may be in full force. The negative end results are already known by economists. Hopefully, the positive end results are somewhere waiting for the growth boom in the near future.

Schumpeter approach to innovation Two different approaches: role of entrepreneurs entering niches of markets. By innovating, entrepreneurs challenged existing firms through a process of “creative destruction”, which was regarded as the engine of economic progress. key role of large firms as engines for economic growth by accumulating non-transferable knowledge in specific technological areas and markets. There is a strong positive feedback loop from successful innovation to increased R&D activities leading to renewed impulses to increased market concentration

Schumpeter creative destruction Creative destruction is a microeconomic process by its nature but has considerable macroeconomic implication for economic growth It creates economic discontinuities, and in doing so, an entrepreneurial environment for the introduction of innovation, and earning monopoly profits. Competition is a self-destructive mechanism that normalizes profits when the innovation effect has been utilized. Creative destruction is associated with innovation of entrepreneurs (or small firms) entering unexplored market where there are low entry barriers for new entrants utilizing the common pool of knowledge

Schumpeter creative accumulation Creative accumulation is associated with institutionalized innovation by MNCs that carry out innovation along established technological trajectories and even try to prevent the entrance of newcomers MNCs dominate global commodity markets by providing world-class technologies and logistics, are important partners for local entrepreneurs are claimed to utilize monopoly power to create high barriers to entry of new entrants impact on industry life cycles and market structure

Schumpeter creative accumulation: evidence When entrepreneurs under creative destruction draw from the public domain only to place their own innovations within the reach of imitators, large firms under creative accumulation appropriate and build on proprietary knowledge stocks through in-house R&D departments. Thomas Edison (1847-1931) owned over a thousand U.S. patents: himself was a pioneer investor creating technological breakthroughs. In the 1890s he established General Electric (GE). GE was among the first ones organizing creative accumulation built on its proprietary knowledge stocks through well-organized R&D departments, including lighting, transportation, power transmission, and medical equipment. GE is still continuing the infinite quality-improvement process

Schumpeter R&D expenditure The heterogeneity of industries is the reason why the relation between concentration and innovative output has often found to be non-significant or even negative Relying on historical analyses, the strategy process is the key managerial innovation by which large firms integrate the core elements of vertical production system or value chain Large firms with integrated manufacturing and R&D can be successful in generating radical product and process innovations although the “escape competition” strategy is common in the global patent race by MNCs.

Schumpeter Human capital role The introduction of innovations open the door to deep transformation of the society Schumpeter strongly believed in human incentive in innovation dynamics as Robert Lucas (first theorist of the endogenous growth) would point decades after (80’). Following the notion of increasing return, Romer (1989) claimed that every generation has underestimated the potential for finding new recipes and ideas. technology is not a mysterious outside force, as economists thought in the past, but an internal one that can be cultivated to increase growth. His main slogan in terms of Schumpeter has been: “The emerging economy is based on ideas more than objects”. The greatest innovations are likely to occur from the cross-fertilization of sectors and professions. For example, artists/ scientists and businessmen work models are interrelated but different. A major difference is that artists/ scientists are more likely to think laterally and holistically, businessmen are linkers of people and concepts whilst businessmen involve a linear thinking pattern