Innovation and Growth: A Schumpeterian Model of Innovation

Following Schumpeter we assume that innovation in specific firms, or groups of firms, can have economy-wide effects. Models based on this idea can be shown to have multiple equilibria. The idea of a positive feedback loop innovation system or POLIS is formalized by picking an appropriate sequence of equilibria over time. It is shown that POLIS has empirical relevance by applying the formal model to an actual economy. The 1997-98 financial crisis in many Asian countries, most notably South Korea, seemed to have reversed the conventional wisdom regarding the East Asian miracle". This paper applies the concept of a POLIS to the case of Taiwan to show that at least in this case, neither the view that the miracle was a mirage nor the view that the growth was a result of factor accumulation only is correct. Ultimately technological transformation - in particular the creation of a positive feedback loop innovation system is what makes the difference between sustained growth and gradual or sudden decline. Although various problems remain in both the real and the financial sectors, the successes of Taiwan in building the preconditions for an innovation system are worth examining. Upon careful examination of Taiwan's system of innovation within the above Schumpeterian model it is found that Taiwan has a fighting chance of building a POLIS in the near future. An interesting feature of the Taiwan POLIS is the modular organizational architecture of some of the high technology firms in Hsinchu science-based industrial park and other centers.