Innovation patterns and technological specialization vary considerably between market economies with different institutions because they coordinate economic activities in different ways with different kinds of firms developing contrasting innovation strategies. Six major forms of economic organization, or business systems, with different kinds of firms can be distinguished: fragmented, coordinated industrial district, compartmentalized, collaborative, highly coordinated and state organized. These kinds of business system develop and are reproduced in particular institutional contexts. They are associated with five kinds of innovation strategies: dependent, craft-based responsive, generic, complex and risky, and transformative. These strategies can be distinguished in terms of the following characteristics of innovations: technical and user uncertainty, user differentiation and product quality specialization, organizational competence destruction, use of codified knowledge, and the complexity of the knowledge base. Firms with different kinds of governance structures and organizational capabilities pursue these innovation strategies to varying degrees in different institutional environments. As a result, institutional differences between market economies lead to variations in innovation strategies and patterns of innovative performance.