Internal (firm) determinants of innovation

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In the previous chapter, the concepts, innovation and economic development, were clarified. It is now the aim of this chapter to place the role of innovation in economic development in its theoretical context through a literature study. It will also seek to provide historical background on the issue. The chapter consists of a critical discussion of the schools of economic thought to establish what role they ascribe to innovation and entrepreneurship. The discussion will include the classical economic theory and the neoclassical theory of “equilibrium in the markets” and “perfectly competitive markets”. Schumpeter’s view and theory will be discussed largely due to the important role that he played in innovation theory. The discussion will include the long wave theory and its part in the role of innovation.
According to Sundbo (1998:4), an “innovation economics” tradition developed in the 1970s and 1980s where innovation theory developed as a particular school of economic thinking. The term “neo-Schumpeterian” is used by some economists to describe this new school of thought, and the neo-Schumpeterian theory on innovation is therefore included in the discussion.

The main contributors to innovation theory

Although many economists have touched on the concept of innovation, Gabriel Tarde and Joseph Alois Schumpeter deserve to be studied in more detail, because of their respective contributions to innovation theory.

Gabriel Tarde’s role in innovation theory

The French sociologist, Gabriel Tarde (1843-1904) has been described as the first great theorist of innovation and entrepreneurship (Barnett,1953:v-vi; Sundbo, 1998:48).
Tarde was the first theorist who used and described the two concepts, invention and innovation, as well as the postulate that innovation comes in waves. Tarde mostly used the concepts of invention and imitation. He believed that first imitators, and not the inventors, play the central role. This corresponds with the innovators in later literature. The major works of Tarde, in which he described the innovation theory, included the trilogy Les lois de l’imitation (1890), Logique Sociale (1894) and L’Opposition Universelle (1897), as well as his work Psychologie Economique (1902) (Sundbo, 1998:49-50).
Latour & Lépinay (2009:35) stated, “Fifty years before Joseph Schumpeter, eighty years before the development of economics of technical change, Tarde places innovation and the monitoring of inventions at the heart of his doctrine”. Sundbo’s (1998:50) view is that Tarde was first in describing the innovation concepts and that this foundation of the innovation theory lived on with Schumpeter, as Schumpeter became known as “the founder of innovation theory”.

Schumpeter’s contribution to innovation theory

Schumpeter made a crucial contribution to the study of the role of innovation in development. Schumpeter (1939:86-87) highlighted the importance of innovation when he wrote, “… innovation is the outstanding fact in the economic history of capitalist society or in what is purely economic in that history…”. He stated his intention is to make the facts of innovation the basis of his model of the process of economic change. As the founder of innovation theory, it is therefore vital to pay some attention to his life and thinking.
Joseph Alois Schumpeter (1883-1950) was born in the Austrian province of Moravia. He studied law and economics at the University of Vienna and started his career by practicing law and teaching political economy. He was appointed as professor at the University of Graz (Austria) in 1911, and was an exchange professor at the Columbia University during 1913 and 1914. In 1919, he served as Minister of Finance of the Austrian Republic, after which he pursued his career in the private sector. In 1921, he became president of a private banking house in Vienna (Biedermann Bank), but when the bank went bankrupt in 1924, he accepted a professorship at the University of Bonn. In 1932, he was appointed at Harvard University and he remained at Harvard until his death. Schumpeter served as president of the American Economic Association for a period, which was unusual for a foreign-born economist. Amongst Schumpeter’s best-known publications are “The theory of economic development” (1911), “Business cycles” (1939), “Capitalism, socialism, and democracy” (1942), and his encyclopaedic “History of economic analysis” (1954) (Brue, 2000:499-500; Hanusch & Pyka, 2007d:19-20; Heertje, 2006:3-4).
Schumpeter’s contribution to the theory of economic development and the role of innovation therein, is remarkable. The following quotes are examples of the recognition Schumpeter received:
“Joseph Schumpeter…was one of the most original social scientists of the twentieth century…Very early he developed an original approach, focusing on the role of innovation in economic and social change” (Fagerberg et al., 2005:6).
“More than half a century after his death, Schumpeter still remains an intriguing source of scientific debate on major economic and social issues and methodology, and empirical research on economic dynamics and technical change” (Heertje, 2006:vii).
“Over the past thirty years a number of economists have dedicated themselves to studying technical change, or innovation more broadly, its sources, and its economic consequences … In all these branches of economics, as well as among scholars directly concerned with technical advance, Schumpeter is widely cited as an inspiration” (Nelson, 1996:87).
“Schumpeter … is the exceptional economist who links innovation to the entrepreneur, maintaining that the source of private profits is successful innovation and that innovation brings about economic growth” (Nafziger, 2006:293-294).

Chapter One – Introduction 
1.1Problem statement
1.2Research questions
1.3Significance of the study
Chapter Two – Innovation and related concepts
2.2The innovation concept
2.4Systems of innovation
2.5Economic development
Chapter Three – Views on innovation in economic thought
3.2The main contributors to innovation theory
3.3The place of innovation in economic theories
Chapter Four – The relationship between innovation and economic development
4.2Measurement of innovation
4.3Measurement of economic development and improvement in economic performance
4.4The relationship between innovation and economic development
4.5The relationship between entrepreneurship, innovation and economic development
Chapter Five – The determinants of innovation 
5.2Internal (firm) determinants of innovation
5.3Environmental determinants
5.4Relative importance of determinants
Chapter Six – The innovation system model 
6.2The innovation system model
Chapter Seven – An evaluation of the Mpumalanga province from an innovation system perspective 
7.2The need for a study of an innovation system for the Mpumalanga province
7.4A description and analysis of the Mpumalanga province from a regional innovation perspective
Chapter Eight – Conclusion
8.3Limitations of the study
8.4Recommendations for further research

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