Schumpeter

Int Entrep Manag J (2006) 2:145–156 DOI 10.1007/s11365-006-8681-3

Schumpeter and new technology based firms: Towards a framework for how NTBFs cause creative destruction
Aron S. Spencer · Bruce A. Kirchhoff

C

Springer Science + Business Media, LLC 2006

Abstract Although Schumpeter’s “creative destruction” has become something of a buzzword, the theoretical underpinnings of his theoryare largely missing from the recent literature on technological change. This paper explores the link between technological change and creative destruction, with particular attention being paid to the role of new technologybased firms in bringing this about. Recurring themes in the technological change literature are examined. These show that the phenomenon of dominant firms failing due to theintroduction of a new (disruptive) technology is creative destruction in action. NTBFs are the most common introducers of disruptive technologies and a leading driver of creative destruction. Keywords Schumpeter . New technology based firms . Creative destruction

New technology-based firms (NTBFs) are held to be important drivers of innovation and economic growth. However, the process by which they dothis is less well understood. New growth theory (Solow, 1956, 1957; Romer, 1990, 1994) has attempted to show a relationship between innovation and economic growth, but has given no role to the individual entrepreneurial firm. This article will explore the relationship between NTBFs and the economy, and particularly the role that NTBFs play in bringing about the Schumpeterian phenomenon of creativedestruction (Schumpeter, 1942). Schumpeter was one of the first persons to explore the role of the new technology-based firm in causing economic growth and development. He was uncomfortable with the static model of economics, largely the work of Walras (1874) and Marshall (1890), who formalised much of General Equilibrium Theory. Though Schumpeter began his work following this path, he soon began tobe uncomfortable with the static model as he felt that the economy
A. S. Spencer ( )· B. A. Kirchhoff New Jersey Institute of Technology, Newark, NJ 07102, USA e-mail: aspencer@adm.njit.edu B. A. Kirchhoff e-mail: kirchhoff@adm.njit.edu Springer

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contained internal elements that caused disruption and change. However, this idea did not fit withWalras’s model, in which the economy only reacted to external shocks. Schumpeter said:
“I felt very strongly that this was wrong, and that there was a source of energy within the economic system which would of itself disrupt any equilibrium that might be attained. If this is so, then there must be a purely economic theory of economic change which does not merely rely on external factors propellingthe economic system from one equilibrium to another. It is such a theory that I have tried to build.” (Schumpeter, 1937, p. 166).

Scumpeter and the entrepreneur Schumpeter’s first major attempt to address this problem occurred in 1911 with the publication of Theorie der Wirtschaftcilhen Entwicklung (The Theory of Economic Development). It was in this work that Schumpeter introduced his theory ofthe entrepreneur. “His general argument was that all truly important changes in the economy are initiated by the entrepreneur, and that these changes then slowly work themselves through the economic system” (Swedberg, 2000, p. 14). Schumpeter’s exposition of the role of the entrepreneur is in the second chapter of this work, entitled “The Fundamental Phenomenon of Economic Development” (Schumpeter,1934). He defined development as the
carrying out of new combinations. This concept covers the following five cases: (1) The introduction of a new good—that is one with which consumers are not yet familiar—or of a new quality of a good. (2) the introduction of a new method of production, that is one not yet tested by experience in the branch of manufacture concerned, which need by no means be...