Innovation

Innovation: * There are two contrasting theoretical views: Schumpeter thinks more innovation is achieved by less competitive markets; Arrow thinks that more innovation is achieved by more competitive markets. Schumpeterian Theory: A distinctive特殊 view of innovation and its central role in the process of competition was developed by Schumpeter in the 1930s and 1940s and has since been developed into a substantive alternative school of thought. Schumpeterian theory suggests a simple monotonous negative relationship between market structure and innovation that less competitive firms are more innovative, so more innovation is associated with less competition. * There are several Features of Schumpeterian theory. Innovation is a broad concept, not just inventing a new product, but a firm can be innovative in the way they compete in a more general sense. Competition is as a process of continual innovation. There is fundamental uncertainty, which cannot be reduced to risk because sometimes we are just unable to identify all possible future scenarios and attach probabilities to these. The theory has an open-ended (non-equilibrium) view and distinctive view of the entrepreneur, moving away from the neoclassical view of equilibrium. There are gains from large scale in R&D. This is because large firms have the resources to invest more in innovation and so get larger return. This leads to social benefits of monopoly/market power because as large firms find it easier to innovate, they are more efficient and therefore their gains are more likely to spill over. Large firms are able to take advantage of unseen innovation as small firms can only focus on existing projects and not undiscovered discoveries. With the absence of patents there will be no incentive to innovate and larger firms are more able to protect themselves as they face less competition compared to smaller firms.

Thus this leads to the Schumpeterian hypothesis that: large firms in