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The Economics of Creative Destruction

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Global Innovation and Economic Value

Part of the book series: India Studies in Business and Economics ((ISBE))

Abstract

This chapter is an empirical study, which uses the theoretical framework on innovation patterns developed by Joseph Schumpeter to examine whether creative destruction was a better value creator compared to creative accumulation. The study is carried out based on the data in the tech industry during the turbulent two-decade period after the dotcom bust.

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Notes

  1. 1.

    This section is based on one of the chapters of the Doctoral thesis titled ‘Impact of innovation on firm performance in global technology companies’ submitted by Vijay Kumar at IIT-Madras in 2013. An abridged version of this chapter appeared as a journal paper written by Vijay Kumar and Rangaraja P Sundarraj (2016), “Schumpeterian innovation patterns and firm performance of global technology companies”, European Journal of Innovation Management, Vol. 19 Issue 2, pp. 276–296.

  2. 2.

    For this section, tech industry includes firms bound by the theme of electronics and/or software.

  3. 3.

    It should be pointed out while initial research simply used a firm’s total patent count as a statistic, following Trajtenberg [23], each patent was weighted by the number of citations it receives in future patents (weighted patent count, or WPC).

  4. 4.

    Profitability (instead of net profits) has been used as it obviates the need to control for size, in addition to eliminating the need to correct for currency fluctuations because profitability is currency neutral.

  5. 5.

    As an example, let us say one is calculating the weighted counts for each of the firms in the group of 20 M-II firms for the year 1990. In 1990, IBM (one of M-II firms) had 609 patent grants, 6617 citations and the total citations of the M-II group were 49,303. One would then scale up IBM’s patent count by a factor (1 + (6617/49,303) to arrive at a weighted count of 691. The process is repeated for each of the firms in the group. Obviously, firms receiving more citations are scaled up correspondingly higher.

  6. 6.

    USPTO has acknowledged that they have not produced listings of citation counts by assignee or by patent.

  7. 7.

    Twenty firms each of M-I and M-II were chosen for several reasons. One, this study analyses the differential in firm performance between the two categories and it was felt that 20 firms in each category would suffice to do the analysis. Second, the M-I firms chosen are considerably stronger economically than the firms originally conceived by Schumpeter (M-I firms are listed entities of at least 20 years of existence as opposed to Schumpeter’s view that they are start-ups and entrepreneurs). The expectation is that if we can establish significant firm performance differential between M-I and M-II with our chosen set, then by logical extension, it would mean that this differential would be valid with smaller, start-ups and entrepreneurial individuals as M-I firms. Third, if we increase the number of M-I and M-II firms to say, thirty, then there is a possibility that the differential between the two could decrease considerably resulting in a probable Type-II error. Fourth, in our data set of 400 firms, several M-I candidates did not meet the M-I criteria because they were either ‘large’ firms (e.g. International Rectifier) or had large patent counts (e.g. Altera Corp.) or had no patenting (e.g. Esco technologies) or were consistent patentees (e.g. Newport Corp.) or were operating in a ‘cumulativeness’ area like Semiconductors (e.g. Cirrus Logic). It is however recognized that with a larger data set, it is possible to extract a list of different M-I and M-II firms (from what has been chosen here) which conform to the criteria shown in Table 3.

  8. 8.

    The correction as suggested has not been applied here for two reasons: (1) as the data sizes are large (>1000) and (2) correction factor makes M-I HHIs very small (of the order of 1 × 10−14) for any meaningful comparison.

  9. 9.

    Profitability (instead of net profits) has been used as it obviates the need to control for size. In addition, because profitability is currency neutral, there is no need to correct for currency fluctuations.

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Authors and Affiliations

  1. Faculty of Management Studies, PES University, Bengaluru, India

    Vijay Kumar

  2. Department of Management Studies, Indian Institute of Technology Madras, Chennai, India

    R. P. Sundarraj

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Kumar, V., Sundarraj, R.P. (2018). The Economics of Creative Destruction. In: Global Innovation and Economic Value. India Studies in Business and Economics. Springer, New Delhi. https://doi.org/10.1007/978-81-322-3760-0_6

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