The ViewWhy China cannot repeat the success of US’ Silicon Valley model of innovation

Most of the time innovation entails a minor tweaking of old ways, but occasionally it generates revolutionary change. The iPod was a modest improvement over many MP3 devices but it transformed the Apple business and impacted most people’s lives.

There are two economic views of how innovation comes about.

Harvard Professor Joseph Schumpeter (1883-1950) emphasised the role of the entrepreneur as an innovator in capitalist economies. His theory is that competition drives invention and discovery. Creative individuals seek out new ways of doing things and finding new things to do in order to increase profit margins and improve their living standards.

Schumpeter described the act of innovation to replace old technologies as “creative destruction.” Silicon Valley best exemplifies his model of capitalist growth, with its abundance of entrepreneurial and technological talent, and access to a vast unfettered market economy.

READ MORE: How companies can innovate from within

Chicago Professor Frank Knight (1885-1972) held a different view. He distinguished between risk and uncertainty. Situations with risk have unknown outcomes but are governed by probability distributions known at the outset. In situations of uncertainty, both the outcomes and the probability models that govern them are unknown.