The objective of the paper is to analyse why some firms innovate while others do not. The paper combines different theories of innovation by relating innovation to internal, firm specific assets and external, regional factors. Hypotheses are derived from theories and tested empirically by using logistic regression. The empirical analysis indicates that internal funding of R&D and size of the firm are the most important firm specific attributes for successful innovation. External, regional factors are also important. The analysis shows that firms located in large urban regions have significantly higher innovation rates than firms located in the periphery, and firms involved in regional networking are more likely to innovate compared to firms not involved in networking. The analysis contributes to a theoretical and empirical understanding of factors that influence on innovation and the role innovation plays in the market economy. Innovation policy should be targeted at developing a tax system and building infrastructure which give firms incentives to invest and allocate internal resources to R&D-activities and collaborate with others in innovation. From an economic policy perspective, consideration should be given to allocating more public resources to rural areas in order to compensate for the asymmetric distribution of resources between the centre and periphery. The paper contributes to the scientific literature of innovation by combining the firm oriented perspective with weight on firm specific, internal resources and a system perspective which focuses on external resources and networking as the most important determinants of innovation in firms.