This chapter builds on traditional and heterodox theories to develop an integrative, information-economic approach to innovation. It focuses on digital innovation, which raises unique challenges for economic theory. Innovation is conceptualized as a combinatorial process in which existing knowledge is combined and recombined to generate novelty. Because digital technology is inherently plastic and malleable, it greatly expands the combinatorial space for innovation opportunities. However, this also potentially increases the cost of finding workable and sustainable innovation projects in that vast space. We discuss the evolution of institutional arrangements that reduce the complexity of this search and coordination process. It distinguishes different types of innovation that coexist and co-evolve in the digital innovation system. Modular, architectural, and systemic innovations constitute specific constellations of technical and economic factors. Complementary, interdependent types of innovation are particularly important in digital information industries. Because these types of innovation flourish under different institutional conditions, the legal and regulatory instruments that have historically governed innovation must also evolve. The chapter concludes with a discussion of whether the rate and direction of innovation can be governed effectively.

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