Introduction

In his Theory of Economic Development, Schumpeter (1934) emphasizes the role of the entrepreneur as prime cause of economic development. He describes how the innovating entrepreneur challenges incumbent firms by introducing new inventions that make current technologies and products obsolete, thus driving them out of the market. This process of creative destruction is the main characteristic of what has been called the Schumpeter Mark I regime. Schumpeter developed his ideas during the first decades of the 20th century when small businesses were considered a vehicle for entrepreneurship and a source of employment and income, setting the stage as defined in Chapter 1.

However, the economies of scale and scope present in production, distribution, management, and R&D dictated increasing firm size from the 1930s onward (Chandler, 1990). Moreover, the growing level of economic development, together with high price elasticities stimulating price competition, favored large-scale production. The increasing presence and role of large enterprises in the economy during this period is well documented (Audretsch, Thurik, Verheul, and Wennekers, 2002a). The importance of small business seemed to fade. At the same time it was recognized that the small business sector needed protection for social and political reasons, but not on the grounds of economic efficiency (Audretsch and Thurik, 2000).

In the years following the Second World War large firms had not yet gained the powerful position of the 1960s and 1970s and small businesses were still the main suppliers of employment and hence of social and political stability (Thurik and Wennekers, 2004).