Introduction

Having recognized the centrality of innovation in capitalist dynamics, Schumpeter moved onto answering the question of how innovation takes place; i.e., what are the patterns in which innovation occurs, in a capitalist system. He gave two answers to this question: in his earlier work, The Theory o f Economic Development (1934), he argued that the major source of innovative activity is small firms operating in highly competitive industries. The primary driving force behind innovations, according to Schumpeter in The Theory o f Economic Development (1934), is the visionary entrepreneur (Schumpeter Mark I). In his later work, Capitalism, Socialism and Democracy (1942), he described an innovation pattern where the major source of innovative activity is large firms operating in highly oligopolistic industries. The principal driving force behind innovations is, now, modem research and development (R&D) laboratories, instead of the entrepreneur (Schumpeter Mark II).