There are two schools of thought on the drivers of innovation: the market-based view of innovation and the resource-based view of innovation. The market-based view of innovation is based on the premise that innovative organizations attempt to exploit changing market conditions. Market conditions are said to provide the initial conditions that govern the direction and quantity of an organization's innovative activities. Tidd et al (2001) state that innovative organizations are those that analyze their environment to absorb and process information relating to potential innovation. The organization's ability to align its strategies with the enablers and constraints identified in its environment has been found to strongly influence its competitive advantage (Barrett et al. 2001). The resource-based view of innovation, on the other hand, argues that the market The innovation-based view offers a weak basis for innovative strategies, particularly in dynamic and volatile markets. Instead, it is believed that the organization's own resources, such as assets, capabilities, routines and knowledge base, can offer a more concrete basis for innovative strategies (Davies and Brady, 2000). Innovative organizations are those that use their internal resources to develop unique resource configurations, thereby building the foundation for successful innovation (Davies and Brady, 2000). Indeed, the general theory of innovation emphasizes 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 research and development and employee training as necessary ingredients to increase and intensify such capital (Baumol, 2002). Baumol (2002) points out that the greater the technological capabilities of a firm, the greater the probability that it will develop further innovation in the future. Baumol (2002) also argues that “innovation begets innovation” (p. 284), emphasizing the path dependence characteristic of innovation. Innovative firms are incentivized to pursue new products and processes provided they are able to reap first-mover benefits (Porter and van der Linde, 1995b). However, the innovator's ability to capture the returns from his innovation is often problematic. Jaffe et al. (2002) state that “… the creator of an asset will typically fail to appropriate all or perhaps most of the social returns it generates”. Therefore, the company's ability to minimize these so-called spillover effects is particularly important and depends on the technological characteristics of the innovation such as technical complexity, patentability and delivery times, as well as on 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 obtained from economies of scale linked to innovation (Smolny, 2003).