The Schumpeterian challenge - the EU is lagging behind

The Schumpeterian challenge - the EU is lagging behind

Schumpeter has been put forward as the father of entrepreneurship. Schumpeter is up-to-date in the turbulent global economy[1]. As a Harvard professor, Schumpeter[2] criticized the neoclassical economic theory that he claimed to hide the fundamental problem of economic change. Schumpeter insisted on the discontinuity between the Walrasian mathematically perfect model, The General Theory and entrepreneurship[3]. His last book[4] was dealing with capitalism we are dealing with an evolutionary process. Schumpeter’s famous prediction concerned the transition from competitive capitalism to trustified capitalism. Multinationals[5] operating in all continents and markets (goods, services, financing, IPRs etc) are, perhaps, examples of trustified capitalism[6], but not of an orthodox monopoly. Multinationals are, however, efficient econonomic agents in the transfer of technology and knowledge wordwide. Asia, China and India, owing to impressive economic growth rates in recent years, can be classified as winners of globalization. They are actively renewing their economic institutions. It is not surprising that multinationals invest in Asia.

In his life’s work, Schumpeter not only recognized the need for a theory of economic development, but also came to understand that such a theory would have to deal with the impacts of transition from entrepreneurial or individual to managerial or collective capitalism in the process of technological change[7]. The geographical clusters[8] of firms have been successful in agglomeration of entrepreneurial and managerial capitalism[9]. Alfred Chandler[10], a contemporary analyst of corporate histories and their role in the economic growth, have found that the so-called vertical integration was the primary reason for the evolution of current multinationals and managerial capitalism, firstly in the US and, later in other contintents. The list of most valuable brand by Interbrand[11] is a good classification of the most successful multinationals in terms of managerial capitalism. Another form of market capitalism, entrepreneurial capitalism is personified by Bill Gates and some other famous capitalists.

In Schumpeter’s thinking, creative destruction creates economic discontinuities, and in doing so, an entrepreneurial environment for the introduction of innovation, and earning monopoly profits. Entrepreneurs as innovators create opportunities for temporary monopoly profits by devising a new product, a new production process, or a new marketing strategy[12] Competition is a self‑destructive mechanism that normalizes the profit level when the innovation effects, value added etc, have been utilized. Entrepreneurial capitalism is the key for economic growth in terms of the new growth theory for some reasons:

Frank Knight[13] distinguished between the objective probability that an event will happen, and, the immeasurable unknown, such as the inability to predict the demand of a new product. Because of the fragile financial system, we will see contionusly financial crises in the global economy. Therefore, there are no objective probabilities of the future events in our globe. The climate change is another reason for the time of uncertainty. There are plenty of opportunities for entrepreneurial capitalism since the 'true uncertainty’ is the contingency where entreprereneurship is floushing in turbulent, global markets.

Schumpeterian creative destruction is continuously going on. Michael Jensen[14] has made an elegant contemporary interpretation of the Schumpeterian creative destruction process. Comparing the growth of GNP with R&D statistics, Jensen predicted the dynamics of modern industrial revolution. Because of the shock of the oil crisis in the mid 1970s, the Western countries invested in R&D. The growth of R&D expenditures has been twice as high as the growth of GNPs. The revolution of information technology (IT) has been the major source of Schumpeterian creative destruction and innovation in the industrialized countries. But a Schumpeterian global shock means that the inefficient firms are being divested[15].

Kenichi Ohmae predicted that the collapse of nation states is to be expected[16]. Region states with sound socio-cultural structure would be the winners of new regional agglomeration[17]. Paul Krugman[18] does not regard nation states as subjects of global competition[19] but rather the basic mechanism is still open, international markets. The global economy has its dark side. Substituting labor with capital and technology, along with shifting production to lower-cost locations has resulted in waves of corporate downsizing throughout Europe and North America[20]. Both continents have, therefore, a need for innovations.

The most debated symbol of globalization is, of course, the WTO (World Trade Organization). The WTO treaty makes all member nation states equal. Non-discrimination is the main principle on which the rules of the multilateral trading system are founded. The WTO TRIPS[21] Agreement established standards of protection as well as rules on enforcement, and most significantly, brought the IPR regimes of WTO member countries under the jurisdiction of the new dispute settlement system of the WTO. The TRIPS is important institutional innovation for knowledge intensive firms. TRIPS is a catalyst for the knowledge economy. Scientific knowledge as a commercial commodity is the most profound characteristics of globalization. The Mega-science themes, like astronomical research and the human genome project, are global as such since they can only be addressed on a global scale. Universities all over the world are actively producing commercial knowledge for business companies, following Stanford University’s role model in Silicon Valley. The foundation is two institutional innovations in the USA. First, the Bay-Dole Act, enacted in 1981, provided universities the first-right to commercialize patents, and, if they fail, the Federal Government retains the ownership of patents and then can grant non-exclusive licenses to interested third parties.[22] Another institutional innovation was the liberalization of the Federal antitrust laws to allow collaborating research projects between firms in the same industry[23].

In this area of institutional development, the EU is lagging behind. The common EU patent law seems to be ‘mission impossible’. However, the EU has also positive examples in institutional development. The co-operation between the Commission and ETSI[24] led to the GSM standard, laid down formally on a voluntary basis[25]. There is a need to incorporate a theory of institutions into economics. Institutions are formed to reduce uncertainty in human exchange, providing actors with ready-made anchors of sense or premises to decisions. “They constitute a capital stock of other people’s reusable knowledge…”[26]. Douglass North[27] has focused on the institutional aspects of economic growth. Institutions that protect property rights and lower transaction costs are the decisive factors of economic growth. The state can never be treated as an exogenous actor in development policy, since the state has the mandate to a set of property rights and enforce competitive market conditions.


[1] Lintunen, Liisa (2000) Who Is the Winner Entrepreneur? An Epistemological Study of the Schumpeterian Entrepreneur (dissertation, Helsinki School of Economics, series A-180, Helsinki.
[2]Schumpeter, Joseph (1937) The Business Cycles, McGraw-Hill, New York.
[3] In Loasby’s thinking evolutionary economics is based on the growth of knowledge, not on the mathematical model to be found in the works of Walras. (Loasby, 1999, Knowledge, institutions and evolution in economics. London: Routledge, pp. 2-4).
[4]Schumpeter, Joseph (1950) Capitalism, Socialism and Democracy, McGraw-Hill, New York.
[5] Professor Theodore Levitt at Harvard who the first who discussed global markets and multinationals. Levitt, Theodore (1983) The Globalization of Markets, Harvard Business Review, May-June.
[6] John Kenneth Galbraight has been the most influencial economist in that topic. Curvailing power is a theory of Galbraight that decribes a certain level of collusion between large firms and the government in order to create monopoly profits (Galbraight, John Kenneth (1956) American Capitalism: The Concept of Countervailing Power, Boston: Houghton Mifflin).
[7] Lazonick, William (1991) Business Organization ant the Myth of the Market Economy, Cambridge University Press (p. 126).
[8]Porter, Michael (1990) Competitive Advantages of Nations, Macmillan, Free Press, New York.
[9] Saxenian, Annalee (1994) Culture and Competition in Silicon Valley and Route 128, Harvard University Press, Cambrigde.
[10]Chandler, Alfred (1990) Scale and Scope. The Dynamics of Industrial Capitalism, The Belknap Press of Harvard University Press, Cam­bridge.
[11] www.interbrand.com/
[12]Schumpeter, Joseph (1934) The Theory of Economic Development, Harvard University Pre­ss, Cambridge.
[13] Knigth, Frank (1920) Risk, Uncertainty, and Profit, Chicago, Univ.of Chicago Press.
[14] Jensen, Michael. (1992) The Modern Industrial Revolution, Exit, and Failure of Internal Control Systems, Journal of Finance.
[15] The global shock in the Finnnish bank industry in the early 90s provides innovative firms opportunities to make temporary monopoly profit(s), if they are able to foresee the new entrepreneurial environment (creative distruction). Otherwise, small innovative firms have the risk of going bankrupt. In the early 90s, about 1/5 of SMEs were going bankrupt because of the global shock and relatively more innovative firms.
[16] Ohmae, Kenichi (1995) The End of Nation State, A Harvard Business Re­view Book, Cam­bridge
[17] Ohmae, Kenichi (1996) The Evolving Global Economy, A Harvard Business Re­view Book, Cam­bridge.
[18] Paul Krugman (1998), The Accidental Theorist, New York.
[19] Krugman, Paul (1994) ”Competitiveness: A Dangerous Obsession”, Foreign Affairs.
[20] Baily, Martin, Eric J. Bartelsman and John Haltiwanger (1996) Downsizing and Productivity Growth: Myth or Reality? Small Business Economics, 8(4), pp. 259-278.
[21] Trade-Related Aspects of Intellectual Property Rights
[22] Universities filed more than 2.000 patents in 1998. The University of California was the top earner of royalty income in 2000, with 261 million dollars. These revenues are invested in new research facilities and filing new patents. (Haour, Georges (2004) Resolving the innovation paradox: enhancing growth in technology companies, p. 85).
[23] Haour, 2004, p. 75.
[24]The European Telecommunications Standards Institute
[25] The GSM market is dominated by five major firms in the late 1990s: Ericsson, Nokia, Siemens, Motorola and Alcatel that control more than 85% of the European GSM market, the largest in the world. (Bekkers, Rudi, Duysters, Geert and Verspagen, Bart (2002) “Intellectual Property rights, strategic technology agreements and market structure: The Case of GSM”, Research Policy, September 2002, vol. 31, p. 1146/ table 1. Collected from http://www.sciencedirect.com).
[26] Loasby, 1999, p. 46.
[27] North, Douglass (1993) Institutions, Institutional Change and Economic Performance, Cambridge University Press, Cambridge.