INTRODUCTION

Innovation results from complex interactions between the impulse of science and the attraction of the market that provide the strategic innovation options facing a firm. Strategic options appear as opportunities, whose profitability depends on such factors as market conditions, the technological environment, the product life cycle, and the skill of a firm's personnel in technology, management, marketing, and other areas. Science provides a stock of available technological knowledge that is the result of accumulated technical expertise, the transfer of new technologies from others, and the firm's own research and development.

Innovation activity depends crucially on the firm's capability to create and acquire knowledge that not only finds inventions but also brings innovations successfully to the marketplace. This capability rests both on a firm's talent for internal problem solving and on its ability to forge productive external linkages via networks, strategic alliances, and user-producer relationships. The process by which firms acquire and generate knowledge is at the heart of innovation activity.

As with any good, innovation results from the combination of inputs that come from both outside and inside the firm. The knowledge-generation process takes outside knowledge and combines it with the firm's own knowledge. But the difference between innovation and the production of existing goods and services is that innovation involves the generation of a good (knowledge) with special characteristics.