Entrepreneurship and Dynamic Capitalism: The Economics of Business Firm Formation and Growth

Schumpeter's theory of creative destruction provides a potent descriptive model of the actual operation of capitalism. Its emphasis on the dynamics of new firm formation and growth concurrent with existing firm decline and termination makes it a central component of the dynamic capitalism theory development effort. Its theoretical explanatory powers have been validated by empirical research during the last fifteen years, reaffirming that the process of creative destruction continues to dominate capitalism in the United States.

Still, in the absence of mathematical elegance and predictive capability, Schumpeter's theory can only be considered a base for development of a dynamic theory, not a finished theory in itself. This chapter is designed to provide additional contribution to the theory development process. The purpose here is to identify aspects of creative destruction that will advance theory development. The modifications proposed rely heavily on empirical observations so as to assure the real-world applicability of the theory.

It is useful here to briefly review the major aspects of invention, innovation, entrepreneurship, and creative destruction. This leads to a clear statement of why the concept of "small firm" becomes central in the development of dynamic capitalism theory. Such a clarification is necessary because heretofore, firm size has not been a significant factor in economic theory. But firm size, especially small size, is central to dynamic capitalism.

After the review of terminology and the explanation of firm size, further modifications are given of Schumpeter's somewhat casual treatment of the innovation and entrepreneurship processes. By specifying

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