The Schumpeter’sEffect:Joseph A. Schumpeter an Austrian-bornAmerican economist and political scientist who became known for hiscontributions to economic theory in the area of innovation andentrepreneurship. This entry introduces Schumpeter’s philosophy as well as histheoretical construct of creative destruction. He is often credited forstarting modern growth theory that is based on the inevitable by-product of theprocess of development and innovation. Schumpeter’s description of theinnovation process and its diffusion continues to be characteristic in thecontemporary knowledge- and technologically driven global economy.

Schumpeter’screative destruction and three firm reactions to innovation:·        Exit, ·        Switch and·        The Sailing ShipEffectCreative destruction was Schumpeter’s term during 1943 for the processby which innovation destroys existing firms and their technologies. It includesthe process of substitution of a new technology for an existing technology forsome defined market. Schumpeter had nothing to say about the possible reactionof the established firms to this process, but we know from work in themanagement area that there sometimes is an active response to the threat ofcreative destruction (Cooper and Schendel 1988, Cooper and Smith 1992, Foster1988). From this literature we can identify three generic strategies ofresponse to the process of substitution, which can be referred to as exit,switch (to the new technology) and the sailing ship effect (the acceleration ofinnovation in the old technology in response to the threat from the new).

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Before we analyse this last we should say something of the other two. ‘Exit’may of course be a forced outcome of creative destruction, via liquidation.However, it is a strategic response if the incumbent firm anticipates problemsfrom future innovation and elects to exit the threatened market early and toits advantage over ‘forced’ exit.The decision to ‘switch’ from the old to the new technology isparticularly interesting and has been the focus for the papers cited above,especially Cooper and Smith 1992. This paper examines eight product lines thatexperienced substitution effects; these range from ball point versus ink pens,to diesel-electric versus steam locomotives. Much of the analysis concerns thebehavior of 27 established firms, selected by Cooper and Smith for theirdominant market position in the old technology. All of these entered the newtechnology, but few managed to establish as dominant a position in the newtechnology as they had in the old.

A diverse range of problems faced thosewishing to switch; these included the problems of internal groups whichrecognized that the advancement of the new technology threatened theirexpertise and power; to the problems of judging how the new technology woulddevelop and which old competencies could be retained and which should be shed. Technology S-curveThe technology life cyclewhich is concerned with the time and performance of developing the technology,the timeline of recovering cost, and modes of making the technology yield aprofit proportionate to the costs and risks involved. Thefour phases of the technology life-cycle: Research and Development (R) phase:  when incomes from inputs are negative and where the prospects of failure are high Ascent phase when out-of-pocket costs have been recovered and the technology begins to gather strength. Maturity phase when gain is high and stable i.e.

the region going into saturation Decline phase of reducing fortunes and utility of the technology.