(FORTUNE Small Business) – Paul Stiros and his team were having trouble devising an antiwrinkling coating that consumers could apply to cotton clothes. So Stiros, 52, the head of research and development for Procter & Gamble's fabric unit, which had led the development of hit products such as Swiffer and Mr. Clean AutoDry, suggested the once unthinkable: He advised his bosses at P&G, an icon of inventiveness, to look elsewhere for its innovation. P&G turned to NineSigma, an "innovation sourcing" firm based in Cleveland that uses the web to blast out queries to nearly 6,000 inventors in small business and academia. They in turn offer fixes in hopes of scoring a contract. Stiros received 18 replies and signed two contracts. Last September he made another surprising move. After a 28-year career at P&G, Stiros left to join NineSigma--as CEO.

From Stiros's example to that of former Microsoft CTO Nathan Myhrvold--who recently founded a skunkworks firm called Invention Science--the responsibility for inventing new products is shifting from corporations to entrepreneurs. After peaking in 2000, industrial R&D spending began a three-year slide, slipping from $185 billion to $173 billion, and R&D Magazine projects the downward trend to continue this year. Large companies, whose obsession with short-term results has led them to unburden themselves of in-house R&D, have begun formal efforts to scour small businesses for innovation. As a result, inventors and invention houses, such as Invention Science and NineSigma, are harnessing the web not only to pool creativity but also to get products to market faster than ever. There is even evidence that small outside firms may simply be better at inventing the new new thing: Consulting firm CHI Research of Haddon Heights, N.J., which tracks innovation, found that among 1,270 "highly innovative" firms--those with 15 or more patents in the previous five years--the number of small businesses rose from 33% in 2000 to 40% in 2002. While the era of Alexander Graham Bell may be gone--the Census Bureau eliminated "inventor" as an occupation in 1940--never has there been more opportunity for entrepreneurial inventors and inventive small businesses.

Corporations have outsourced a fraction of their R&D for years, but today their dependence on entrepreneurs for innovation is unprecedented. During the past three years P&G has cut in-house R&D spending from 4.5% of sales to 3.5%, while increasing the share of ideas and products it gets outside the company to 35% from 20%; its goal for the process, called Connect and Develop, is 50%.

Pharmaceutical giant Eli Lilly has created InnoCentive, a website that lets corporations post biology and chemistry needs, such as a new gametogenesis inhibitor (which slows the formation of germ cells), in the hope that one of InnoCentive's more than 70,000 registered "solvers" from 173 countries will cough one up. The carrot for the inventors: a $10,000 to $100,000 award from the corporation. Since 2001 more than $1 million has been paid out, and more than 35 corporations--including Boeing and DuPont--have ponied up $80,000 each for access to the process (Innocentive receives a 20% commission on the awards). A byproduct of its role as an innovation matchmaker, says CEO Darren Carroll, is that InnoCentive has become a "spot market" that entrepreneurs use to turn downtime into money.

This scramble for outside ideas has been driven by Wall Street's obsession with predictable quarterly numbers. "When times get rough, the layoffs hit R&D, because why worry about five years from now when you have to worry about tomorrow?" says Paul Sheldon, who formed a one-man design house in 1995 after he left his position as a research VP at Giddings & Lewis, a Fortune 500 machine tool company based in Fond du Lac, Wis. Happily, even as short-term investors have stymied internal corporate R&D, technology has given inventors such as Sheldon the ability to join forces efficiently to fill the gap. "If you can collaborate with the best and brightest in a matter of seconds, are you small?" asks Jay Walker, 49, who founded Priceline.com and now runs Walker Digital, a private R&D lab in Stamford, Conn. Indeed, creative entrepreneurs are rattling such sophisticated and capital-intensive industries as space travel, where Burt Rutan lapped NASA with his reusable SpaceShipOne vehicle.

Somewhat less high-profile--but just as emblematic of the trend--is Jennifer Sarihan, a 34-year-old mother of three in Springfield, Ohio. In early 2003, Sarihan decided to take a stab at inventing a plastic cutting device that could remove bread crusts and halve sandwiches in one motion. But she was, she says, "kind of at a loss with what to do" with Good Bites, the implement she devised. Sarihan then learned of Mom Inventors, a California company that licenses mom-made inventions and sells them over the web and through a network of stores. Mom Inventors founder Tamara Monosoff, 39, licensed the product from Sarihan for a standard licensing royalty of around 5%, and predicts that the product, together with two others Monosoff has signed up, will bring in at least $1.7 million this year.

Besides harnessing the web to bring products to market, entrepreneurs are taking advantage of the outsourcing of R&D by building companies that will be bought by corporations looking for quick, proven innovation. The number of sub-$50 million acquisitions--the type that large companies make when they buy small, young firms to gain access to innovative products--has exploded from 322 in 1995 to more than 1,400 in 2004, according to FactSet Mergerstat, a mergers and acquisition data firm based in Los Angeles.

David Brussin accounted for one such acquisition. After filing for a patent in 2001 on an antispam router for corporate networks, Brussin decided to spin out the router as its own company. After Brussin co-founded TurnTide with $1 million in venture funding in February 2004, one of his first customers was Symantec, a more-than-$2-billion-a-year security software company. Four months after TurnTide was founded, Symantec bought the company for $28 million. Says Jay Walker, a student of the history of American innovation and one of its most active contemporary players: "I wouldn't pick on the large corporations as much as say it's never been a better time to be small."