Innovation drives the knowledge economy. Innovation provides the competitive advantage to those firms and entrepreneurs who act boldly and imaginatively with diligent purpose and focus. An innovation is the implementation of a new or significantly-improved product, process, marketing approach, or organizational method. It requires careful analysis of the needs and capabilities of the intended users (Drucker, 1985). Innovations may be grouped in four ways:

1. Product innovations are those introductions of new or significantly-improved goods or services, and may include significant improvements in technical specifications, components and materials, software, user friendliness, or other functional characteristics. Product innovations can be based on new uses or combinations of existing knowledge or technologies.
2. Process innovations implement improved production or delivery methods, and include changes in techniques, equipment, and/or software.
3. Marketing innovations involve changes in product design or packaging, promotion, or pricing. Such innovations are aimed at opening up new markets and/or new positioning of a firm's product to increase sales.
4. Organizational innovations are new methods in a firm's business practices, workplace organization, or external relations. Such innovations are intended to increase a firm's performance by reducing transaction costs, gaining access to non-tradable assets, or reducing supply costs.

This innovation typology (product, process, marketing, and organizational) was compiled by Rajnish Tiwari (2008) of the Hamburg University of Technology and based on the Organisation for Economic Co-operation and Development's (OECD) 2005 Oslo Manual on The Measurement of Scientific and Technological Activities.

It is important to note that innovation is increasingly a function of collaboration as pointed out in a 2008 Information Technology and Innovation Foundation report (Block & Keller, 2008). In today's world, collaboration is critical to private sector innovation. Such collaboration underscores the critical role of government agencies, federal labs, and research universities. Public agencies and institutions of higher learning can act as critical partners and/or catalysts in the innovation process. Innovation is fundamental to future economic productivity and community prosperity. Meaningful measures of collaboration on a regional level need to be developed. National indicators that measure innovations do not lend themselves to regional aggregation.

A Toronto newspaper declared "Innovate or Perish" in reporting on the recent release of a Canadian government report on the state of science, technology, and innovation in Canada (Campion-Smith, 2009). This succinctly sums up the pivotal position of innovation in the global knowledge economy. And innovation is indeed a global economic phenomenon. South Korea, for example, may be a relatively small country with limited natural assets but its leadership fully understands the innovation imperative. The Boston Consulting Group ranks South Korea first in its 2009 International Innovation Index (Andrew, DeRocco, & Taylor, 2009). The U.S. ranks eighth in the overall Index behind Finland, Hong Kong, Switzerland, among others, but second in the large-country ranking.

A community's capacity to nurture and support innovation is a key indicator of its competitive position in the global knowledge economy.

The indicators of Innovation Capacity include Patents, Venture Capital, and High-Tech Sector Performance.