The public sector has traditionally been considered inhospitable to innovation, particularly innovations initiated by middle managers and front‐line staff. Unlike the private sector, the public sector is characterized by asymmetric incentives that punish unsuccessful innovations much more severely than they reward successful ones, by the absence of venture capital to seed creative problem solving, and by adverse selection by innovative individuals against public service careers. A growing body of evidence based on applications to innovation awards reveals that, despite this inhospitable environment, frontline public servants and middle managers are responsible for many innovations. In addition, some public sector organizations have consistently produced a large number of innovations. Draws on this evidence to suggest ways of enhancing public sector organizations’ capacity for innovation.

This article considers the nature and role of leadership in three ideal types of public management innovation: politically‐led responses to crises, organizational turnarounds engineered by newly‐appointed agency heads, and bottom‐up innovations initiated by front‐line public servants and middle managers. Quantitative results from public sector innovation awards indicate that bottom‐up innovation occurs much more frequently than conventional wisdom would indicate. Effective political leadership in a crisis requires decision making that employs a wide search for information, broad consultation, and skeptical examination of a wide range of options. Successful leadership of a turnaround requires an agency head to regain political confidence, reach out to stakeholders and clients, and to convince dispirited staff that change is possible and that their efforts to do better will be supported. Political leaders and agency heads can create a supportive climate for bottom‐up innovation by consulting staff, instituting formal awards and informal recognition for innovators, promoting innovators, protecting innovators from control‐oriented central agencies, and publicly championing bottom‐up innovations that have proven successful and have popular appeal.

One element of the debate over New Public Management concerns public‐sector entrepreneurship. Critics see entrepreneurs as people prone to rule breaking, self‐promotion, and unwarranted risk taking, while proponents view them as exercising leadership and taking astute initiatives. This article examines two samples of the best applications to the Ford Foundation—Kennedy School of Government innovation awards, one between 1990 and 1994 and the other between 1995 and 1998, to see whether they are more consistent with the critics' or proponents' views. The second sample closely replicates the first, and the evidence from both strongly supports the proponents' views. Innovators are creatively solving public‐sector problems and are usually proactive in that they deal with problems before they escalate to crises. They use appropriate organizational channels to build support for their ideas. They take their opponents seriously and attempt to win support for their ideas through persuasion or accommodation.

Based on samples of 217 of the best applications to the Ford Foundation‐Kennedy School of Government innovation awards and 33 of the best applications to the Institute of Public Administration of Canada's management innovation award, both between 1990 and 1994, this article discusses the nature of public management innovation in the United States and Canada. Some of the issues examined are (1) the characteristics of public sector innovations, (2) where in the organization innovations originate, (3) whether innovations come about as a result of planning or groping, (4) the obstacles to change innovators faced and how they overcame them, (5) the results achieved by these innovations, and (6) whether these innovations were replicated. It is found that, despite the difference between congressional and parliamentary government and the different problems being addressed, the patterns of innovation are similar in the two countries. © 2000 by the Association for Public Policy Analysis and Management.