Schumpeter and Innovation: Relevance to Present Day Biotechnology

Innovation is the process by which the ideas in the theoretical term (creativity) are translated into

the practical solutions to enhance the human welfare. It is the ability to initiate and put into

practice creative solutions to problems and challenges in order to enrich human lives. Any ideas

or creative thinking can be called innovation when they are replicable in economic costs and

must satisfy specific needs. According to Paul Schumann, “Innovation is the way of

transforming the resources of an enterprise through the creativity of people into new resources

and wealth”. However in broader term, we can say that innovation is anything that is new world

with economic output for human welfare.

One of the most influential economists, Joseph Alois Schumpeter, considers innovations,

entrepreneurial activities and market power as most important factors driving economic changes.

He argues innovation as the action of active entrepreneur. Schumpeter classifies innovations in

two major categories (product and process innovations) and five classes. They are;

Product innovation: Product innovation comprises the creation of new product which

adequately satisfies the previously satisfied needs of the customers. The concept of product

innovation is equally important in today’s world especially in biotech world because it can create

monopoly position to the innovator in the business field. For example, production of vaccine

against HIV certainly creates monopoly in the market for an innovator. Any innovations in

pharmaceutical products that have lower side effect and more efficient treatment capacity

certainly have economic benefit to the innovator. Therefore, Schumpeter’s concept of product

innovation is relevant in present biotech world.

Process innovation: A process innovation replaces one production or consumption method of a

product by another. Though the product formed from the new process may serve the same or

approximately similar purpose, the unit production cost can be cheaper and greater will be the

profit margin.

For example, the more efficient Next Generation Sequencing processes for gene sequencing

replaced the Sanger sequencing. Thus the Next generation sequencing process for DNA

sequencing is easier and faster, and has better market position than the Sanger sequencing.

A new source of supply of raw materials: New materials or supplies have the potential of

lowering the unit production cost. New substrate for any brewing industry can revolutionize the

business by lowering the unit production cost. Any innovative ideas regarding the new raw

material and new source of raw material for production of biotech products such as enzymes can

have better competitive advantage over other competitors. For example, if monoclonal antibodies

can be produced by culturing in cheaper medium than in Mammalian cell lines, and then it will

revolutionize the world of immunotherapy with minimal cost.

Market power: Finding a new market for the product or finding a new business model is one of

the important forms of innovation. Market power can stimulate technological progress because

firms innovate on the expectation of receiving monopoly.

New organization of any industry: According to Schumpeter, restructuring of industry in the

form of merger and acquisition, or collaboration is also a form of innovation. Merger and

acquisition helps in breaking up the monopoly as well as creating own monopoly. Though many

economists and Neo- Schumpeter do not consider reorganization of an industry as an innovation,

strategic alliance with other company can be beneficial to a biotech company and to some extent

it is relevant for a biotech company.