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Economic Welfare, International Business and Global Institutional Change

Edited by Ram Mudambi, Pietro Maria Navarra and Giuseppe Sobbrio

The distinguished authors in this volume address the fundamental causes for such heterogeneous international experiences, placing particular emphasis on the role of institutions. They demonstrate how the study of economic development is increasingly linked to the development of institutions, which allow for more complex exchanges to occur in markets and societies. Institutions can be understood as rules or constraints that channel individuals' actions in specific directions, and can be formal or informal depending on their genesis. The book highlights the connection between institutions and economic welfare by examining countries at different stages of development. Although the authors' study material effects, they also look at individual well-being which is more strongly influenced by the non-material products of institutions such as opportunity, freedom and relationships. They move on to highlight the role of institutions in global business, in terms of innovation, entrepreneurship and foreign direct investment. In the concluding chapters they focus on the actual process of transition from one institutional framework to another. Amongst other examples, they examine reforms to international financial institutions and constitutional adjustments in transition countries.
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Chapter 7: The Changing Institutional Form of Innovation: From Exploiting Market Power to Developing Corporate Technological Capability

John Cantwell


John Cantwell 1. INTRODUCTION In this chapter the Schumpeterian theory of profits and growth through innovation is revisited and recast, with explicit reference to the changing institutional form of innovation during the twentieth century. It is shown how many clues for the restatement and modernisation of Schumpeter’s approach can be found in Edith Penrose’s theory of the growth of the firm, her 1959 book having benefited from her reading of what for our purposes are the crucial aspects of Schumpeter (1943). The chapter has three sections following this introduction. Section 2 sets out an evolutionary and institutional account of how profits are created through innovation, which is contrasted with the standard interpretation of Schumpeter’s theory found in the literature. It is argued that the standard interpretation does not do justice to Schumpeter’s theory, but that the original theory requires adaptation in any case to better reflect the means by which capitalist institutions have promoted innovation during and beyond the twentieth century. The third section reviews Penrose’s work on the growth of the modern firm, demonstrating how she incorporated Schumpeter’s insights into her thinking, and explaining how her approach provides a link between Schumpeter’s theory and the modern institutional form of innovation in the large firm. The remainder of the chapter in Section 4 illustrates and elaborates upon the argument through some evidence on the changing form of innovation in large firms in the major industrialised countries during a first phase roughly from 1900 to 1970, and a more recent phase...

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