In the literature, there is a trend towards a system approach. Empirical studies using this approach distinguish four parts in the innovation-performance relationship. First of all, a company decides whether or not to innovate. Second, if a company decides to innovate, what is the level of input in innovation. The innovative input will be transformed into innovative output. And finally, the innovative output will result in a better firm performance. In the model several feedback loops are incorporated, for instance, from firm performance to innovative input.

In the paper, the results are presented of an empirical test of this model. The model is tested for three groups of companies, all companies (1-99 employees), small companies (1-9 employees) and medium-sized companies (10-99 employees). It proved that it is important to distinguish between small and medium-sized companies. For the two groups, different factors explain the relationship between innovative input, innovative output and firm performance. Furthermore, the results indicate that national innovation policy is effective, especially for small companies. The level of innovative input of these small firms is influenced by the use of national subsidies and contacts with intermediate organisations focussing on innovation. This higher level of innovative input results in more innovative output and a better firm performance.

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