Where is the innovation coming from now?

Today I read on the BBC that soliders are learning battle-field tactics through a virtual simulator called Virtual Battle Space 2.

The story spiked my interest in a way that transcends virtual games and treads on the much broader subject on what used to be called the military-industrial complex. That is, the industry of government contracts, mostly defence contracts, farmed out to large corporations for the research and development of complex industrial machinery and technology.

The thought that I have is that back in the day (I guess that'd be pre-21st century) it was quite easy for governments to manage secretive technological innovations by contracting to a small number of large industrial corporations. However the real innovation nowadays is not really in how to build a bigger jet fighter or a stronger motorised tank, rather it's in the more abstract spaces of how to build a smaller camera or smarter information technology. In these areas you don't need the capital or manpower of a large industrial corporations, really you just need some computing power and plenty of brainpower.

Back in 1992 John Ralston Saul compiled his polemic, Voltaires Bastards, that gave a fascinating insight into the sales conventions held by arms dealers in exotic locations with many mysterious characters. The sales booths were selling stinger missiles, fighter jets and land mines. It was scary stuff and it all seemed to be dominated by the large industrials.

So, finally getting to the point - whereas in the past it was quite easy to say that the real innovation and technological leaps were made through large corporations, in today's world where does the real innovation come from? Is Virtual Battle Space 2 really much better than World of Warcraft or Grand Theft Auto IV? Are the secretive industrial complexes still hiding the technology or is it the small commercial start-ups that are the innovators of the 21st century? Is transition from disparate units of knowledge to a hyper-connected society braking down the barriers to innovation?

Maybe yes, or maybe no, or maybe I might just be living in a naive idealistic world where innovation comes from the masses for the masses. I hope I'm right.