Schumpeterian Influences on the Theory of Innovative Enterprise

For over five decades, I have constructed the theory of innovative enterprise (TIE) by integrating insights from the history of economic thinking and the study of comparative economic development. TIE provides a conceptual framework for analyzing the interactions of three “social conditions of innovative enterprise”—strategic control, organizational integration, and financial commitment—in generating a product that is higher quality and lower cost than those previously available for its market. A company can develop a higher-quality product by investing in organizational learning. If successful, the company can capture a larger extent of the market, and thus, through economies of scale, transform the high fixed cost of organizational learning into the low unit cost of the sold product. Companies that use accumulated capabilities and capacity to innovate in multiple product markets can reap economies of scope. By focusing on specific characteristics of social conditions that may support or undermine the innovation process in specific industrial and institutional contexts, TIE is an engine of analytical inquiry for comparing national systems consisting of industrial sectors (technologies, markets, competitors), business enterprises (strategy, organization, finance), and economic institutions (governance, employment, investment). Foundational to my intellectual evolution in conceptualizing TIE, mainly during the first quarter-century of my career (1970–1995), was the study of the works of Karl Marx (1818–1883), Alfred Marshall (1842–1924), and Joseph Schumpeter (1883–1950) in relation to the stages of capitalist development from which each derived his own insights. Of these three historic thinkers, Schumpeter was the one who brought the analysis of comparative economic development into the first half of the twentieth century, focusing on innovation as the “fundamental phenomenon”. Among other things, Schumpeter’s ideas helped me to integrate into my analysis of the growth and decline of business corporations the pioneering contributions of the economist Edith Penrose (1914–1996) and the historian Alfred Chandler (1918–2007)—both of whom I knew personally. In this essay, I recount how I was introduced to the Schumpeterian perspective; how I made use of Schumpeter’s insights through my own study of the comparative economic development of the United Kingdom, the United States, and Japan; how his critique of “perfect competition” exposes the fatal fallacy of neoclassical economic theory; and how his arguments encouraged me to practice a research methodology that integrates history and theory.