2. INTRODUCTION
The Innovation Theor y of Profit was
proposed by Joseph. A Schumpeter,
who believed that an entrepreneur
could earn economic profits by
introducing successful innovations.
– In other words, innovation theor y
of profit posits that the main
function of an entrepreneur is to
introduce innovations and the profit
in the form of reward is given for his
per formance.
3. Schumpeter Innovations
And Types
INNOVATION THEORY OF PROFIT POSITS THAT THE MAIN
FUNCTION OF AN ENTREPRENEUR IS TO INTRODUCE
INNOVATIONS AND THE PROFIT IN THE FORM OF REWARD IS
GIVEN FOR ITS PERFORMANCE:
SCHUMPETER IDENTIFIES FOLLOWING FIVE TYPES OF
INNOVATIONS THAT DEFINE THE ENTREPRENEURIAL ACT
TYPES OF INNOVATION:-
• PRODUCT
• PROCESS
• BUSINESS MODEL
• SOURCE OF SUPPLY
• MERGERS & DIVESTMENTS
4. Schumpeter Innovation Theory Of Profit:
Prof J. A Schumpeter Theory.
The main function of Entrepreneur is to introduce
innovation and profit is the reward for introducing
innovation.
Innovation is the act of discovery and introducing
the new idea in the production Process.
There are two types of Innovation, which are
1) Those which change the production function and
reduce the cost of production.
2) Those innovations which stimulate the demand for
the product, which change the demand or utility
function.
Profit is both cause as well as effect of introducing
innovation.
5. CHARACTERISTICS OF INNOVATION
THEORY
(1) Innovation is the prime function of an entrepreneur: Innovation means new combinations
of production.
(2) Innovation is separate from invention: Invention means discovering new methods and
new materials. And, innovation means utilizing the inventions.
(3) Entrepreneurial role in economic development: An entrepreneur is the central character
of economic development”.
(4) Difference between entrepreneurial functions and managerial functions: Managers only
ensure proper utilization of an organization’s resources. On the other hand, entrepreneurs
create new products, develop new technology, open a new market, discover a new source of
raw material etc.
(5) Pre-requisites for entrepreneurship: Personal entrepreneurial qualities along with suitable
environment play an important role in the expansion of entrepreneurship.
(6) Entrepreneurial motivation: Desire to do something new, independence, personal
accomplishment, play an important role in entrepreneurial motivation.
(7) Innovation, development and profit rotate in a cyclical framework: The more the
innovation, the more the profit for the entrepreneurs.
7. Criticism of Innovation Theory
It ignores the element of uncertainty.
In addition to innovations, there are many other factors which give
rise to profits.
In modern enterprises, it is the entrepreneur who bears the risk,
not the capitalist as professor Schumpeter believes.
The theory also does not consider profits as the reward for risk
taking. According to prof. Schumpeter,
"the entrepreneur is never the risk-bearer. The one who gives
credit comes to grief if the undertaking fails
The lastly, it has also been said that the function of the
entrepreneur is not only to introduce innovations but also to
organize the business
8. CONCLUSION
The Schumpeter's innovation and entrepreneur concept is Universal and still
evolving in principles.
The theory of innovation is one of the most important economic theory which
deals with the origin of entrepreneurship in countries like India where economy
is highly dependent on agricultural sector.
Schumpeter’s views are particularly relevant to developing countries and low
industrialized nations where innovations needed to be encouraged and
promoted as mean of improving the conditions of living and employment.
Innovation must be visible in any of the five sectors mentioned by Schumpeter.
It must be noted that the innovator entrepreneurs have actually contributed
beyond the imagination in the growth and stability of capitalism and have
pushed the economic development upwards.
