Most policy-makers and academics acknowledge that new firms are vital for the prosperity and renewal of economies and the generation of new innovations. However, scholars and practitioners alike still have limited knowledge about how new firms are able to develop and launch innovations. This is surprising given that innovation is an important means of competition and growth for new firms, especially in industries where customer demands and technology fluctuate frequently.

This dissertation examines why some new firms are able to innovate while others are not. In doing so, the study builds upon conceptual arguments concerning the absorptive capacity of firms (i.e. their knowledge acquisition, assimilation, transformation, and exploitation activities) and longitudinal empirical data from over 300 new firms in the Swedish TIME sector. The detailed findings help to open up the “black box” relationships among different capabilities and types of knowledge (e.g. market and technological) in order to explain innovation, as well as how growth willingness and environmental dynamism affect these relationships The results thus shed light on central questions in Entrepreneurship research as well as how entrepreneurs can purposefully affect the innovative behaviour of their firms.