There are two schools of thought on the drivers of innovation: the market-based view and the resource-based view of innovation innovation. The market-based view of innovation is based on the principle 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) assert that innovative organizations are those that scan their environment to absorb and process information regarding potential innovation. The organization's ability to align its strategies with the determining factors and constraints identified in its environment strongly influences 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 based on a multi-sector approach provides a weak basis for innovative strategies, particularly in dynamic and volatile markets. Instead, it is believed that the organization's own resources, such as its 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 configurations of resources, thereby laying the foundation for successful innovation (Davies and Brady, 2000). Indeed, the general theory of innovation underlines the importance of a company's technological capabilities for its innovation capacity (Baumol, 2002; Rosenberg, 1974). A firm's technological capabilities are ultimately defined by its physical capital and knowledge, with investments in R&D and employee training being the necessary ingredients to increase and intensify this capital (Baumol, 2002). Baumol (2002) emphasizes that the higher the technological capabilities of a company, the more likely it is to develop more innovations in the future. Baumol (2002) also argues that “innovation breeds innovation” (p. 284), emphasizing the path dependence characteristic of innovation. Innovative firms have an incentive to pursue new products and processes provided they are able to reap first-mover advantages (Porter and van der Linde, 1995b). However, the innovator's ability to capture the benefits of his innovation is often problematic. Jaffe et al. (2002) state that “…the creator of an asset will generally fail to appropriate all, or even most, of the social returns it generates”. Therefore, the company's ability to minimize these 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 the market structure (Rödiger -Schluga, 2005). Monopolistic market structures dominated by large firms are least affected by appropriation problems due to the limited risk of imitation and the benefits gained from economies of scale linked to innovation (Smolny, 2003).