Post-Schumpeterian Innovation Paradigm: A Dual-Wheel Drive of Technology and Regulation for Green Transformation

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Abstract

The post-Schumpeterian era has constructed a green innovation paradigm that balances profit-making and environmental goals through a dual-wheel drive of technology and regulation to achieve green transformation. Under this innovation paradigm, two issues need to be addressed. First, the immature green technologies and product markets cannot generate sufficient profit incentives for enterprises to pursue sustainable development. Therefore, government regulation and policies must play a role, following a path of “social initiative—regulatory constraints—policy incentives—policy withdrawal”, transitioning from government regulation to corporate voluntary action. Second, without the leverage of market mechanisms, green technologies themselves lack the motivation and capacity for sustainable development. Therefore, it is necessary to rely on market forces, following a path of “technological breakthrough—technology diffusion—market expansion—profit acquisition”, to organically integrate the goals of green transformation and corporate profitability. In the growth period of green innovation, regulatory constraints and policy incentives play an especially important role. In the mature period, the market will become the dominant force driving green transformation.

Schumpeter’s innovation theory emerged during the era of capitalist industrialization, primarily focusing on the entrepreneur’s profit-driven recombination of production factors. As humanity entered the 21st century, scientists and government organizations timely proposed the goal of sustainable development, ushering in a new innovation paradigm that balances profit and environmental objectives. We refer to this as the “post-Schumpeterian” innovation paradigm. This paper systematically explores the evolution of Schumpeter’s innovation paradigm and the new characteristics of the new paradigm, attempting to answer two critical questions: How does government regulation become corporate action? And how can green technologies leverage market forces? Based on these, we propose a new perspective of dual-wheel driven green transformation, powered by both technology and regulation.

1. Post-Schumpeterian Era: Characteristics of Green Innovation

Economist Paul Sweezy once said, “Modern orthodox economists, in their systematic theoretical analyses, never attempt to analyze the evolutionary process [of capitalism]. This may be said to be axiomatic. But there is one important exception, and that is Schumpeter, whose Theory of Economic Development stands out as a notable departure from traditional standards in this respect.”1 In the early 20th century, the United States experienced a revolutionary transformation in communication, transportation, and industry due to the widespread use of telephones, electric motors, and electric locomotives. Technological innovation and the renewal of machinery stimulated production development, and the U.S. economy experienced the “Roaring Twenties.” Against this backdrop, Schumpeter not only analyzed the evolutionary process of capitalism but also proposed a theory that “economic change originates in innovation.” He defined innovation as a new combination of production factors, and entrepreneurs as the primary organizers and drivers of “new combinations” and “economic development.” Schumpeter’s innovation was aimed at obtaining “entrepreneurial profits,” and the characteristic of this innovation paradigm was that it was driven by “economic interests” to motivate entrepreneurs to pursue new combinations of production factors.

In the subsequent development of innovation theory, the “neo-Schumpeterian paradigm” and the “post-Schumpeterian paradigm” emerged successively. After the 1950s, based on the systematic progress of Western economies and technologies, neo-Schumpeterianism emerged in the economics community. It expanded Schumpeter’s innovation theory in two aspects: the economics of technological innovation, which focuses on technological change; and the economics of institutional innovation, which focuses on institutional change. The characteristic of this neo-Schumpeterian paradigm is that it began to pay attention to the role of government regulation, thus developing the national innovation system theory developed by Christopher Freeman and Richard Nelson and constructing a model of innovation driven by technology and institutions.2 Since the 1970s, the depletion of natural resources and environmental degradation have become the focus of attention of economists and policymakers, objectively requiring the inclusion of “sustainable development” or “green transformation” into Schumpeter’s innovation theory, thus forming the “post-Schumpeterian” innovation paradigm. The characteristics of this paradigm are: firstly, it emphasizes the important role of non-producer factors in the occurrence of innovation activities, including the roles of government, social organizations, and consumers; secondly, it emphasizes the implementation of green-oriented technological innovation, especially the effective guidance of innovation towards the field of green technology through public policy.3

Looking back at the evolution of Schumpeter’s innovation theory, it presents a development landscape composed of three innovation paradigms. The expansion mainly follows two paths: first, the evolution of the meaning of innovation, from the simple pursuit of profit and economic interests to the balance of economic interests and social interests, especially the inclusion of the goal of “sustainable development” and the focus on the green transformation of technological progress; second, the evolution of the organization of innovation, from innovation organized solely by entrepreneurs to the national innovation system composed of entrepreneurs, government, etc., especially emphasizing the positive impact of government regulation and public policy on innovation, including the positive role of green-oriented policies.

Table 1: Evolution of Schumpeterian Innovation Paradigm

2. How Government Regulation Becomes Corporate Action

In the realm of sustainable development and green transformation, “market failure” is a common phenomenon, necessitating government regulation to fill the void. Particularly during the industrialization period, Adam Smith’s “invisible hand” proved inadequate in guiding the economy toward green transformation and green technological innovation. The nascent green technology and product markets lacked the necessary incentives to drive enterprises toward pursuing economic and social sustainability. In other words, innovation solely driven by profit would not spontaneously lead to green transformation. “Market failure” refers to the inability of market mechanisms to achieve optimal resource allocation and maximize social welfare due to the existence of public goods, externalities, and economies of scale. As Krugman stated, “When markets fail to produce efficient outcomes, government intervention can improve social welfare. That is, when market forces are working against efficiency, a well-designed government policy can sometimes move society closer to an efficient outcome by altering the use of society’s resources.”4 Aghion argued that such a problem indeed exists in the realm of green innovation: “If technological change is to be directed towards green innovations and environmental disasters are to be avoided, government intervention is indispensable. In the absence of government intervention, firms will not spontaneously choose to undertake polluting technological innovations, and this tendency will become increasingly pronounced under path dependence.”5 This corporate behavior can be rationally explained by several theories: (1) The logic of the tragedy of the commons, where the green governance commons is a domain that every member of society enjoys the right to use and where it is impossible to prevent others from using common resources, leading to a lack of motivation for enterprises to develop green technologies.6 (2) The logic of collective action, where in the public domain of green governance, maximizing individual behavior does not ensure the maximization of collective action benefits, and enterprises’ attempts to “free ride” are unlikely to produce rational collective or social outcomes.7 (3) The logic of path dependence, where the more achievements a company has in traditional technologies, the more likely it is to continue technological innovation in that area, rather than spontaneously shifting to green technology innovation.8

Due to the “market failure” in the field of green technology, green transformation has undergone a long process and has been driven by international society and governments. Environmental disasters have promoted the emergence of a new environmentalist concept: sustainability or sustainable development. In 1987, the Brundtland Commission published a report titled “Our Common Future,” defining sustainable development as “meeting the needs of the present without compromising the ability of future generations to meet their own needs.”9 The 1992 United Nations Conference on Environment and Development identified climate change and biodiversity loss as the most urgent global problems; the 1997 Kyoto Protocol became the first binding international treaty to reduce global emissions; and the 2015 Paris Agreement began to seek binding policies to halt global warming and included developing countries. While international organizations have been making efforts, governments around the world have also been taking active measures: first, formulating a series of regulations for ecological and environmental protection; and second, introducing a series of fiscal policies to protect the ecological environment. There are some successful cases in this regard: (1) In the late 1970s, the U.S. government committed to solar and wind power generation, first introducing the Energy Tax Act, which provided a 30% tax credit for residential users and a 10% tax credit for commercial users, and then the Public Utility Regulatory Policies Act, which required utilities to purchase electricity from renewable energy power plants, thereby promoting the advancement of new energy technologies. (2) In 2012, Japan accelerated the development of low-carbon and energy-saving technologies, first by the Ministry of Economy, Trade and Industry launching the “Clean Energy Vehicle Import Subsidy” directly to consumers, and appropriately reducing the acquisition tax and vehicle tonnage tax for new cars based on energy-saving levels, and then by the central government issuing the “Green Growth Strategy” to limit harmful gas emissions. (3) In recent years, China has significantly increased its support for new energy vehicle technology innovation, with national ministries and commissions issuing government green procurement documents, requiring the electrification of public vehicles, relaxing restrictions on new energy vehicle purchases and exempting passenger car purchase taxes, and local governments also adopting corresponding preferential policies to promote the rapid development of new energy vehicles.

Clearly, the development of green transformation and green innovation requires the role of government regulation and policy to gradually transform it into corporate action. The specific path and mechanism are as follows: the first step is to propose the concept of green development and green technology through social initiatives, creating a good social atmosphere and cultural environment; the second step is to adopt a “carrot and stick” approach, while introducing regulations to restrict high-energy-consuming technologies and industries, also introducing preferential policies to encourage the development of green technologies and industries; the third step is to implement policy withdrawal, allowing the green technologies and industries that have been supported to enter the track of normal development, transitioning from government regulation and incentives to corporate voluntary action.

Table 2: Green Transformation Roadmap 1

3. How Green Technologies Leverage Market Forces

While the role of government and regulation is undoubtedly important, green technologies themselves lack the sustainable momentum and capacity for development without leveraging market mechanisms and forces. Therefore, the fundamental solution lies in harnessing market forces to organically integrate the goals of green transformation and corporate profitability. Elkington proposed the concept of “green capitalism,” advocating for a triple bottom line of profitability, environmental quality, and social justice.10 Hawken introduced the concept of “natural capitalism,” a new business model that seeks to generate commercial profits while protecting natural resources.11 These scholars attempt to address the connection between green transformation and profit generation. Since businesses cannot abandon their profit-making function, they ultimately rely on market mechanisms and forces.

However, in commercial practice, the profitability of green technologies often weakens. Since the emergence of new environmentalism, green entrepreneurs have been working to create new markets. Creating new markets requires answering two questions for consumers and customers: First, do green products truly possess superior performance compared to traditional products? For example, do electric vehicles have superior functions compared to traditional vehicles? Second, why should consumers pay a higher price for green products and related services? For example, why should consumers pay a higher price for organic food? To answer these questions, enterprises need to make efforts in promoting green concepts, innovating green technologies, and improving marketing methods, thereby exploring a path to drive green transformation through market forces. For example, before the 1980s, organic food was sold poorly due to its high price. To address this, green entrepreneurs did three things: first, they relied on technological advancements to improve the performance of organic food; second, they built a supply chain system consisting of wholesalers and retailers; and third, they reduced the premium of organic food. Since the 1980s, the organic food market has grown rapidly and has expanded from developed country markets to emerging markets.

For instance, since the beginning of the 21^st century, China has been committed to developing the new energy industry, focusing on the photovoltaic and new energy vehicle industries. (1) The photovoltaic industry, from polysilicon, silicon wafers, and cells to modules, has rapidly developed under the impetus of the international market and government support. Significant breakthroughs have been made in battery conversion efficiency and packaging technology. In 2024, the growth of domestic photovoltaic manufacturing and exports reached 30%, and the international market share of photovoltaic modules, cells, and silicon wafers reached 25%, 80%, and 95%, respectively. However, significant overcapacity has led to declining prices and profits, necessitating the elimination of relatively backward enterprises through technological upgrades and market competition to achieve market and price equilibrium. (2) Electric vehicle manufacturing has grown rapidly in recent years due to technological advancements and price advantages. Motors have reached an internationally leading level, batteries have reached an internationally advanced standard, and electronic controls are approaching an internationally advanced level. In 2020, sales reached 6.887 million units. However, there is still a problem of insufficient profitability overall. Except for leading companies like BYD and Tesla, most electric vehicle companies are in a state of loss, such as NIO, Xiaopeng, Ideal, and Li Auto, with annual losses of 14.94 billion yuan, 9.14 billion yuan, 20.3 billion yuan, and 51.1 billion yuan, respectively.12 The future lies in increasing market concentration through technological upgrades and market competition. It is evident that the development of green technologies and green industries ultimately relies on the driving force of market mechanisms and market forces.

Clearly, while the development of green technologies and green enterprises requires the support of government and social organizations in the initial stages, it ultimately relies on the driving force of market forces. The specific path and mechanism are as follows: the first step is the breakthrough of green technologies, often occurring in developed countries, creating new technologies and products; the second step is the diffusion of green technologies, radiating and driving industrial development domestically, and then spreading the technology to emerging countries; the third step is to occupy the market, gradually expanding the sales market through technological improvements and marketing. As the market expands and economies of scale are formed, market forces drive green transformation.

Table 3: Green Transform Green Transformation Roadmap 2

4. Conclusion

In his 2017 book, Profit and Sustainability, Harvard Business School professor Geoffrey Jones stated, “History has shown that profit and sustainability are difficult to reconcile. To date, green environmentalism has rarely led to economic returns.”13 Seven years have passed, and the world is undergoing new changes. With the rise of the new energy industry, Jones’ view needs to be adjusted. Once new energy technologies and industries reach maturity, they will be accepted by producers and consumers, gradually developing into profitable technologies and industries.

Green transformation is a complex systems engineering project. It not only relies on government impetus but also, more importantly, on the support of green technological innovation, which in turn requires the support of a green innovation system. In this system, technology and regulation are like the two wheels of a car, driving green innovation from its infancy to maturity. At the same time, during its growth period, government regulations and policy incentives play a particularly important role. In its maturity period, the power of the market gradually grows and eventually becomes the dominant force driving green transformation.

References

1. Joseph A. Schumpeter, Theory of Economic Development, trans. Rudolf B. Stern (Beijing: Commercial Press, 2000)
2. Jing Chen and Li Jiaxue, “Innovation Commons: New Explorations of the Post-Schumpeterian Innovation Paradigm,” Science of Science and Management of S&T 8 (2022): 8–12
3. Philippe Aghion, The Power of Creative Destruction: Economic Upheavals and the Wealth of Nations (Beijing: CITIC Publishing Group, 2021), 183
4. Paul Krugman, Krugman’s Economics (Beijing: China Renmin University Press, 2011), 17
5. Aghion, Power of Creative Destruction, 191
6. Jing Chen and Li Jiaxue, “Innovation Commons: New Explorations of the Post-Schumpeterian Innovation Paradigm,” Science of Science and Management of S&T 8 (2022): 13–18
7. Mancur Olson, The Logic of Collective Action: Public Goods and the Theory of Groups (Shanghai: Gezhi Press and Shanghai People’s Publishing House, 2018), 3
8. Aghion, Power of Creative Destruction, 189
9. Geoffrey Jones, Profit and Sustainability: A History of Green Entrepreneurship (Beijing: Commercial Press, 2023), 226
10. Jones, Profit and Sustainability, 231
11. Jones, Profit and Sustainability, 234
12. China Automotive Technology Research Center, China New Energy Vehicle Industry Development Report (2023) (Beijing: Social Sciences Academic Press, 2023)
13. Jones, Profit and Sustainability, 521