ECO 368M - Schumpeter

define creative destruction

process through which innovations replace older products, technologies, firms, or ways of organizing production

how does creative destruction promote economic growth?

by raising productivity which raises the economy’s growth potential and improves living standards

example of creative destruction

smartphones: iphone and android displaced nokia’s and blackberry’s market leadership through software development

schumpeter vs marx on capitalism

both said capitalism was dynamic and would not survive. schumpeter said capitalism would fall bc of its success and success undermines innovation. marx said capitalism woud lead to its own demise and start revolutions due to class conflict.

state two contradictions of stabilized capitalism

1. innovation continuously changes products and businesses so capitalism can’t remain “fixed”

2. changes disrupt existing industries and affect suppliers and distributors, continuing disequilbrium

why did nokia and blackberry fall?

nokia: fell b/c they were slow to response to software devlopments like touchscreen and app stores, gradual loss may have delayed response and sense of urgency

blackberry: focused on business users and failed to response when the market shifted to consumer uses and cell-phone innovation

two points about schumpeter’s view of “perfect competition”

1. firms use business strategy and make different decisions that shape their economic environment rather than being identical producers of the same good

2. innovation can give a firm temporary monopoly profits, and competition then goes through imitation and further innovation rather than assuming all firms are identical from the beginning

methods to protect against competitors (PIA)

p: patents to protect an innovation
i: innovating further to hold maintain market advantage
a: advertising to defend product’s position in the market

“competing down” in two steps

1. firms develop an innovation and initially earn high profits

2. competitors imitate the innovation, increasing competition and causing market prices and innovator’s profits to fall (unless protected by patent)

two strengths of Chinese companies in developing innovative products and services

1. large home market allows to test products/services before introducing it to foreign markets

2. rising investment in R&D and research activity of firms provide resources for technological development

obstacles China faced transitioning from imitation to innovation (4 s’s)

1. state-sector dominance: state-owned firms dominated key sectors and made it difficult for private companies

2. spending: high spending in R&D didn’t guarantee innovation

3. sheltered: home market lets a firm get huge without proving it can beat global competitors

4. suspicion: overseas worries about government links and industrial espionage limited access to foreign markets

Huawei as an entrepreneurial innovator

went from an importer of telecommunications to a major global telecommunications business which showed how an entrepreneur can reshape a business and challenge established competitors

two ways access to finances supports innovation

1. credit allows for people with entrepreneurial ability to establish a venture before the posess the funds

2. large firms can finance risky innovation through retained earnings and capital markets, reducing reliance on bank loans and allowing them to fund research

digital services can make entrepreneurship easier by

lowering start up costs, given that they have a stable institutional system and sources of investment finance

two competitive pressures faced by apple/samsung according to yueh

1. market saturation: slower smartphone sales growth in developed markets limit opportunities for expansion

2. new competitors in China are competing for international market shares

apple and samsung possible response to competitive pressures

apple: offer complimentary software like music streaming services along with hardware

samsung: invest in wearable technology, although uptake is slow as shown by apple

schumpeter doesn’t imply apple/samsung will be ___, he implies:

replaced; creative destruction pushes for continued innovation but doesn’t identify the next winning firm or innovation

“made in China” vs “designed in China”

mic: manufacturing in China doesn’t establish that Chinese firms created the tech

dic: Chinese firms develop useful innovations and globally competitive products and brands, moving beyond assembly

mic vs dic: why it’s important for China’s growth (two reasons)

1. entrepreneurial innovations raise productivity and drives economic growth

2. product and brands recognized internationally for quality demonstrates Chinese firms can compete through innovation