Two schools of thought exist on the drivers of innovation: the

market-based view and resource-based view of innovation. The

market-based view of innovation is founded on the premise that
innovative organisations attempt to exploit changing market
conditions. Market conditions are said to provide the initial
conditions that govern the direction and quantity of an organisations
innovative activities. Tidd et al (2001) assert that innovative
organisations are those that scan their environment to absorb and
process information regarding potential innovation. The ability of the
organisation to align its strategies with identified enablers and
constraints in their environment are found to highly influence its
competitive advantage (Barrett et al. 2001).

The resource-based view of innovation, on the other hand, argues

that the market-based view of innovation offers a weak foundation
for innovative strategies, particularly in dynamic and volatile
markets. Instead, it is believed that the organisations own
resources, such as its assets, capabilities, routines and knowledge
base, may offer a more concrete basis for innovative strategies
(Davies and Brady, 2000). Innovative organisations are those that
utilise their internal resources to develop unique configurations of
resources, thereby building the foundations for successful
innovation (Davies and Brady, 2000).

Indeed, general innovation theory stresses the importance of a

firm’s technological capabilities for its innovative capacity (Baumol,
2002; Rosenberg, 1974). A firm’s technological capabilities are
ultimately defined by its physical and knowledge capital, with
investments in R&D and education of employees as necessary
ingredients to increase and intensify such a capital (Baumol, 2002).
Baumol (2002) emphasise that the higher the technological
capabilities of a firm, the more likely it will develop further innovation
in the future. Baumol (2002) also argues that “innovation breeds
innovation” (p. 284), pointing to the path dependency characteristic
of innovation.

Innovating firms are incentivised to pursue novel products and

processes provided they are able to reap first-mover benefits
(Porter and van der Linde, 1995b). However, the ability of the
innovator to capture the returns of his innovation is often
problematic. Jaffe et al. (2002) assert that“… the creator of an asset
will typically fail to appropriate all or perhaps most of the social
returns it generates”. Therefore, the ability of the firm to minimize
these so-called spill-over effect are particularly important, and
dependent on technological characteristics of the innovation such
as technical complexity, patentability, and lead time as well as the
market structure (Rödiger-Schluga, 2005). Monopolistic market
structures dominated by large firms are the least affected by
appropriation problems due to the limited risk of imitation and the
benefits gained from scale economies related to innovation
(Smolny, 2003).