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Entrepreneurs know that it is their responsibility as pioneers in their industries to introduce new ideas, concepts, products, services, and more. At the root of their involvement in any given field, entrepreneurs must embrace innovation.


Joseph Schumpeter

A 20th century Austrian economist, Joseph Alois Schumpeter is credited with the formation and realization of a number of influential terms and practices. Schumpeter formed the theory of innovation to coincide with existing theories pertaining to the investment cycle. Schumpeter recognized that, as explained by those theories, business fluctuations are largely caused by monetary expansion and a change in investment. Going further, Schumpeter argued that it is innovation that primarily causes business fluctuation.



An important distinction to make in regards to this terminology is that Schumpeter did not mean for “innovation” to be interchangeable with “invention.” Instead, “innovation” can refer to a number of things including the creation of new products, applications of new technology, the use of new raw materials, the opening of a new market, or the reorganization of an industry. With this broad definition of innovation, Schumpeter argues that these advances in business practices, dealings, and creations are what drive growth and market shifts.



It is undeniable that innovation is an essential aspect of entrepreneurship. Developing new processes and products must be done for businesses to stay relevant and successful. However, many critics have taken issue with Schumpeter’s theory. Some criticisms reference the lack of consideration for risk in the entrepreneurial process, which plays a significant role in the outcome of any innovative product or practice. Additionally, critics have dismissed this theory as it treats innovation as the sole influential factor in business fluctuations rather than one of many.

Some argue that this theory of innovation fails to take into account economic factors and instead focuses on sociological factors, which makes the theory difficult to assess in action. A final criticism has occurred due to the localized application of Schumpeter’s theory; in developed nations, his theory is generally applicable and sound, but in developing countries, there are fewer entrepreneurs in general, let alone those who prioritize innovation as a key facet of their practice.


In spite of the criticisms, Schumpeter’s theory of innovation has influenced entrepreneurship as well as the development of subsequent economic theories.


Destry Witt writes independently of his business, RELiANCE Investing, Inc., which is a Registered Investment Advisor only. This information is not intended to be personalized. This content is for informational purposes only. Nothing presented here should be construed by anyone as an invitation or solicitation to buy or sell any investment.