How has innovation impacted a whole economy?
After reviewing the innovation progress in chapter 1, the second chapter looks at how innovation has impacted a whole economy. In the 1990s, the rapid growth of the Internet was exciting, despite that stock bubble in 2000, the Internet and electronic commerce was there to stay. The macro-level innovation is followed by micro-level innovation such as Google.
Joseph Alois Schumpeter proposed the most famous interpretation of innovation: the original factors of production regroup and change its industrial capabilities to meet market demand, thereby creating profits.
Innovative course will create profits, but there is damage due to innovation, because innovation would destroy the existing economic model, but after the destruction, the new replaces the old, the result is more beautiful, which is famous Schumpeter's "creative destruction" theory.
Schumpeter’s definition of innovation is the following:
1. Product innovation: Including the creation of new products, consumers have not yet familiar with the product or improve product quality.
2. The process innovation: Containing new manufacturing methods and processes to improve the flow of production.
3. The market innovation: Developing new markets or entering new markets.
4. Supply of innovation: Developing new sources of raw materials or improving existing supply pipes.
5. Structure Innovation: Formatting new organization or creating new industrial competition structure, such as the creation or destruction of oligopoly position in any industry.
Schumpeter’s book "Business Cycles" described the association of innovation and creative destruction and economic boom cycle. He believed that the reason why the economic environment changes is that entrepreneurs’ introduce their innovation into an existing balanced economic environment and make a profit, which may cause other entrepreneurs to follow up to make a profit in the same period. The result is that the original balanced economic situation is broken, resulting from a balanced movement, the growing prosperity of the whole economy, resulting in "prosperity." Then, the rate of innovation, production, prices and profits began to decline; the reduction process is "recession." Economic recession will result in trouble; this is the "depression." Nevertheless, after a considerable time in the future, this situation will be broken or gradually improved, and reach equilibrium, this process is the "recovery."
Economic prosperity is the above-mentioned four stages of the cycle, and then innovation occurs after the entire cycle.
The other case study is the United States auto industry that describes the origin and growth of the automobile industry in the United States. William Abernathy pointed out that the pattern of early innovation usually begins with product innovation and then later shifts to production process innovation. The rate of product innovation peaks about the time of the introduction of a design standard. This theory is proved by the case study. The case of Ford’s Model T provided a product-design standard. The auto market became saturate. Moreover, the United States auto firms neglected to develop the fuel-efficient cars and trucks that would save the companies. The auto producers did not meet the demand for fuel-efficient cars that came about as a result of the subsequent increase in gasoline prices. The 1970s saw the beginnings of significant U.S. market share loss to foreign auto producers from Japan and Germany.
Thoughts:
Harvard Business School professor Clayton M. Christensen derived his theory from Schumpeter’s “disruptive construction” and then re-raised to “disruptive innovation”. In short, the destruction of innovation refers to a new product that is easier to use, more convenient or less expensive to a new target untapped customer base. New vendors often use this method to enter the market, thus successfully destroy the original market structure and create new market share.
The following figure described Christensen’s theory:
In Taiwan, Schumpeter’s opinion is particularly relevant. Schumpeter considered that full employment and economic stability is not a healthy phenomenon, nor is it that a modern government should pursue the goal. He noted that the cyclical downturn resulting in temporary closures and unemployment, but it is to maintain economic vitality and sustain the necessary process efficiency and low inflation.
This "creative destruction of capitalism" is that: when the business is down the bottom of a cycle, some entrepreneurs have to consider withdrawing from the market or the other entrepreneurs must be "innovative" in order to survive. As long as the inefficient competitors are be sifted out or some successful "innovation" come out, it would allow the economy to enhance. But when an industry regain profitable growth, it will attract new competitors to join, and then was a profit decay process, back to recession state. Therefore, each depression contains a technical innovation, or it can be said: The result of technological innovation will have to be expected for the next depression. That is, Schumpeter’s opinion that the capitalism is creative and destructive from the same cause.
Schumpeter's insight, for now, still has a special significance. In terms of Taiwan, full employment and economic stability is our pursuit of the goal, we always want to see businesses out of the market due to the recession, so there is always a myriad of policies to prevent this from happening, and therefore our economic vitality gradually disappear.
