In an attempt to enhance firm’s competitiveness, policy initiatives have sought to encourage more firms to innovate, with a particular focus on small firms. The success of such initiatives, however, depends on a clear understanding of the factors that are constraining innovation activity, and whether these differ for firms of different sizes. This paper examines those resources and capabilities that firms identify as constraining their innovation activity, the difference in these for small and larger plants and the actual impact of these perceived constraints on the probability of innovating and the degree of innovation success. Drawing on longitudinal data the paper demonstrates that innovation is an evolutionary process with the constraints to innovation being different for small and larger plants. From a policy perspective, initiatives to overcome constraints to innovation in small plants should extend beyond those of finance to include greater networking opportunities, cost reduction programmes and marketing strategies to increase the profit margin on new products, human resource management practices on implementing change and easier access to information about new technologies. In contrast policies to promote innovation in larger plants should focus on minimising the risk of development and enhancing access to specialist expertise. Copyright Springer 2006

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Successful innovation depends on knowledge-technological, strategic and market related. In this paper we explore the role and interaction of firms' existing knowledge stocks and current knowledge flows in shaping innovation success. The paper contributes to our understanding of the determinants of firms' innovation outputs and provides new information on the relationship between knowledge stocks, as measured by patents, and innovation output indicators. Our analysis uses innovation panel data relating to plants' internal knowledge creation, external knowledge search and innovation outputs. Firm-level patent data is matched with this plant-level innovation panel data to provide a measure of firms' knowledge stock. Two substantive conclusions follow. First, existing knowledge stocks have weak negative rather than positive impacts on firms' innovation outputs, reflecting potential corerigidities or negative path dependencies rather than the accumulation of competitive advantages. Second, knowledge flows derived from internal investment and external search dominate the effect of existing knowledge stocks on innovation performance. Both results emphasise the importance of firms' knowledge search strategies. Our results also reemphasise the potential issues which arise when using patents as a measure of innovation.