Schumpeter Innovation Theory – Meaning, Assumptions, Limitations and Forms


What Is Schumpeter Innovation Theory?

Who is Schumpeter?
Schumpeter’s full name is Joseph Alois Schumpeter. He was born in Austria on February 8, 1883. He was an Austrian political economist. He was the finance minister German-Austria in 1919. He migrated to the United States America to become a professor at Harvard University. In the USA he spent until the end of his career. In 1939 he obtained American Citizenship. Schumpeter was one of the most successful and popular economists of the early 20th century.

What Is Schumpter Innovation Theory?

Innovation theory refers to doing new things on doing things that are already being done in a new way. Innovation is different from research which is totally independent. Entrepreneurs are associated with innovation. 
They are Specially motivated and talented class of people. Their innovative behaviour engages them in new and useful things in an Improved way.
According to Schumpeter:
Entrepreneur Is essentially a Creative activity which is not related to the ordinary course of business. An entrepreneur is a motivated and talented person who plays a vital role In the Country.
Joseph Schumpeter also describes that entremener as one who seeks to reform and revolutionise the pattern Of production by exploiting innovation. He also viewed that an entrepreneur does not only desire to Range his Consumption Standard by carening handsome profit but also desines to find a Private dignity.

Forms of Schumpeter Innovation Theory

According to Schumpeter, Innovation may occur in the following forms.The forms of Innovation are discussed below.
1.Introduction of new product: 
One of the forms of Innovation is the introduction of new products with which consumers are not familiar.
2.Introduction of new method of product:
Another important form of innovation is introduction of new methods or techniques of production which are not yet tested by  experience or any manufacturing organisation.
3.Opening of new market:
Opening of a new market is another smoother form of innovation. It means a market into which the specific product has not previously entered.
4.New source of supply of materials:
The discovery of a new source of supply of materials is also deemed as a form of innovation.The materials may exist in the market for the first time.
5.Carrying out form of organisation:
Innovation may occur in the form of carrying out new forms of organisation. For example creating of monopoly, the banking up of monopoly etc.

Assumption of Schumpeter Innovation Theory 

According to the Schumpeter Innovation Theory innovation is based on some assumption. Some assumptions are highlighted below.
  • Existence of availability of capital.
  • Existence of a developed banking system to provide required capital.
  • Existence of high level developed technology.
  • Existence of private initiative.
  • Existence is one of the broad based entrepreneurial processes.

Limitation Of Schumpeter Innovation Theory 

Schumpeter Innovation Theory has the following limitation.They are highlighted below.
  • Schumpeter’s entrepreneurial theory is suitable for large scale business, whereas an entrepreneur can’t carry on large scale business from the beginning.
  • Schumpeter’s theory of innovation gives more importance of emphasis on innovation function.
  • Schumpeter’s entrepreneurial theory of innovation represents the most vigorous types of enterprise. But these types of enterprises are very rare in the developing economy.
  • Schumpeter’s theory also did not explain why some countries have more entrepreneurial talents than others.
  • Schumpeter’s theory of entrepreneurship is both wide and narrow. It is wide in the sense that it includes independent businessmen, company directors and mangers. It is narrow in the sense that the individual operators existing business without performing innovation function.
Schumpeter, who believed that an entrepreneur can earn economic profits by introducing successful business ideas. According to Schumpeter the main reasons for the business cycle are innovation and invention of something new in the business model like new project launch,new technology, new method of work etc. 
According to schumpeter innovation theory innovation is further divided into some major categories.
  • Innovation introduced new goods for market needs.
  • Innovation creates new methods of Production.
  • Innovation provides opportunities for opening new markets.
  • It discovered a new source of raw material for the business model.
  • Innovation helps to modify the business model of the enterprise.
  • Innovation helps to manage the management system of the business model.


According to Joseph Alois Schumpeter innovation in business models need skilled entrepreneurs and stable capital and innovation means creating any business policy that an entrepreneur makes to reduce the overall cost of the production or increase the demand of the business production.

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