Joseph Schumpeter, an eminent economist, described entrepreneur as “one who seeks to reform or revolutionize the pattern of production by exploiting an innovation or more generally, an untried technological possibility for producing a new commodity or producing an old one in a new way, by opening up a new source of supply of material or a new outlet of products”.
Thus, Schumpeter’s theory sees the potential profitable opportunities and exploits them. He is of the view that an entrepreneur doest not only desire to raise his consumption standard by earning handsome profits but aspires to find a private dynasty also.
Therefore, according to Schumpeter, an entrepreneur is one who innovates, raises money, collects inputs, organizes talent, provides leadership and sets the organization.
Schumpeter, for the first time in 1943, assigned an important role of innovation to the entrepreneur. He did not equate entrepreneur with an inventor.
An inventor creates a new product while Schumpeter’s entrepreneur exists if the factors of production are combined for the first time also. A distinction between an inventor and innovator has also been made by Schumpeter. Innovator utilizes discoveries in order to make new combinations.
According to Schumpeter, innovation leads to the introduction of a new product, in the market institutes new production technology which is not yet tested, new quality of product can be brought in, expanding the market by entering into new markets into which the specific product has not entered so far, discovering new source of supply of raw materials and helps in carrying out a new form of organization of a business venture.
Schumpeter’s theory is based on the following assumptions:
1. Existence of sufficient availability of capital.
2. Existence of developed banking system to avoid scarcity of capital.
3. Existence of high level developed technology.
4. Existence of private initiative, and broad based entrepreneurial process.
Considering the above assumptions, it can be inferred that applicability of Schumpeter’s theory is more in a developed economy and it may not be suitable for the underdeveloped economy.
It is because in underdeveloped economies, the path of innovativeness is blocked by scarcity of capital and other facilities.