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Innovation and knowledge creation—these two concepts have a strong relationship but this relationship has not been examined systematically. This paper reviews the important theoretical work in both streams of research, highlighting the fundamental similarities and differences. Four major models of innovation are compared, and the distinction between radical and incremental innovation is examined. The nature of organizational knowledge and the process of knowledge creation are presented. We then compare the principal findings of the research on innovation and knowledge creation, and conclude with a new framework that differentiates types of innovation based on a knowledge creation perspective.