File 5: Schumpeter on the generation of new technology

Question 1

What does innovation require?

Answer 1

ideas and cost: requires ideas be brought together with resources which requires incentives

Question 2

What are the 2 types of cost of innovation?

Answer 2

time of inventors and capital costs (material, experiments)

Question 3

What generates an incentive to innovate?

Answer 3

competitive markets

Question 4

What occurs if innovation diffuses too rapidly?

Answer 4

the firm may not profit much from the innovation which reduces incentive to incur cost of innovation

Question 5

What are intellectual properties?

Answer 5

patents, trademarks, copyrights

Question 6

What is the function of intellectual property?

Answer 6

they protect investments in innovations to ensure returns are large enough to procure incentive to incur cost of innovation

Question 7

Where do the ressources for innovation come from? (4)

Answer 7

1. firms use their profits
2. group of firms pool together to fund RD
3. venture capitalist
4. government fund innovation through their own labs, through university, through contracting with firms/favourable tax treatment of innovation expenses

Question 8

what is government procurement?

Answer 8

government provides ressources for innovation through contracting with innovating firms

Question 9

What is the incentive for firms, individuals and goverment in providing ressources for innovation?

Answer 9

markets!

Question 10

the more competition, the more ______

Answer 10

innovation

Question 11

Give an example of competition providing incentive for innovation.

Answer 11

Germany’s chemical industry in the late 19th century:

1. germany did well in science based industry: chemicals and organic chemicals
2. price of chemicals were declining rapidly due to innovations (reduced cost and cost reductions reduces prices to consumer, increases productivity)
3. However, there were only small number of large producers who detained monopoly thus not very competitive
4. but prices declined because the threath of substitutes and threat of new entries.

Question 12

What does Schumpeter argue abour monopoly and innovation?

Answer 12

monopoly is necessary to important innovation

Question 13

According to Schumpeter, what are two kinds of technological change?

Answer 13

1. Adaptive: small improvements

2. Qualitative/ discontinous: new market, new source of material, new method of production, new organization

Question 14

What does Schumpeter argue about qualitative and discontinous change?

Answer 14

it unleashes the gale of destruction (reduces the likelyhood of firm risk it) through:

1. forces old firms out of business
2. disturb environment of rational calculation
3. require substantial amount of risk taking and substantial ressources
4. small businesses do not have ressources for this kind of innovation nor the capacity to take the risk

Question 15

According the Schumpeter, what does innovation require? (2)

Answer 15

1. large fims to provide ressources to support RD and exploit economies scale in research
2. monopoly power to reduce risk involved in innovating