Abstract: Whether or not the market structure of large-scale enterprises having the monopoly power promotes innovation is a long-term concern problem. Based on Schumpeterian hypothesis, western scholars carried out theoretical and experimental analysis. The basic idea of the former researches is studied and an analytical framework is put forward to understand the interaction of innovation and market structure in the dynamic process of industrial evolution. The framework is applied to analyze the interaction mechanism between innovation and market structure of China as a developing country being in its transition and four evolution stages. A new interpretation of Schumpeterian hypothesis on China’s industrial development is offered and the relevant policy implications are explained.