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# 2 What is innovation?

Joseph Schumpeter, a seminal thinker on the crucial role of innovation in economic development, argued in his classic book The Theory of Economic Development that capitalism is fundamentally a dynamic system of change and is incapable of remaining static (Schumpeter, 1934). He describes the ‘perennial gales’ of ‘creative destruction’ unleashed by innovation, which drive cyclical patterns of growth and decline – boom and recession – in markets and economies. Schumpeter made an early characterisation of innovation that is still relevant today, defined as any of the following five phenomena:

- The introduction of a new good (product). This should be new to customers or offer superior quality compared with the past.
- The introduction of a new method of production that is new to an industry sector.
- The opening of new markets.
- The exploitation of a new source of the supply of raw materials or components.
- The implementation of new organisational forms that enable greater competition and can lead to restructuring an industry.

(Adapted from Schumpeter, 1934, p. 66)

Another key dimension of innovation is Schumpeter’s distinction between radical and incremental innovation. Radical innovations occur as a result of the introduction or clustering of revolutionary new technologies that have major socio-economic impacts. Incremental innovations are associated simply with improvements (Schumpeter, 1934).

Schumpeter’s view of innovation is that it can be found in introducing new or improved goods, establishing new production methods, opening up new markets, enabling access to new supplies of resources, and introducing new competitive organisational forms.

The term ‘innovation’ has since been extensively debated and used in a wide range of ways. One study (Baregheh, Rowley and Sambrook, 2009) identified 60 definitions of innovation in organisations alone. In part, at least, these differences are a result of the different concerns of different academic disciplines and the perspectives of different stakeholders, as well as the different contexts in which innovation is considered. The next activity shows some of the different perspectives on innovation.

## Activity 1: Perspectives on innovation

Allow 10 minutes

Match the different stakeholders to the correct description of their interest in innovation.

Interested in the contribution of innovation to the performance of sectors or the national economy and therefore in the generation of new products or processes.

The economist

Interested in how individuals decide whether or not to adopt an innovation and its subsequent impact on their lifestyle.

The social scientist

Interested in how to prepare their organisation to generate innovations new to markets and industries, or in how their organisation might most effectively adopt or configure innovations generated elsewhere for use in their own organisation.

The innovation managers

Using the following two lists, match each numbered item with the correct letter.

1. Interested in the contribution of innovation to the performance of sectors or the national economy and therefore in the generation of new products or processes.

2. Interested in how individuals decide whether or not to adopt an innovation and its subsequent impact on their lifestyle.

3. Interested in how to prepare their organisation to generate innovations new to markets and industries, or in how their organisation might most effectively adopt or configure innovations generated elsewhere for use in their own organisation.

1. 1

   The economist

2. 2

   The social scientist

3. 3

   The innovation managers

The correct answers are:

- 1 =
- 2 =
- 3 =

What the term ‘innovation’ means, then, depends to some extent on who is using the term and the context in which it is used. An important message from this discussion is that innovation refers to both a process and to the outputs and outcomes of that process.

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