This empirical study investigates the factors that influence firms' incentives to innovate. We study the variables stimulating, enabling and conditioning the idea generation process in small and medium-sized service firms. The employees and their context determine the richness of the early stages of the innovation process, and thus the firms' incentives to innovate. Of the final set of explanatory variables, the most significant 'manageable' variable is the formulation of clear innovation objectives in the corporate strategy. Furthermore, fostering freedom to experiment and applying multifunctional teams have positive effects on the incentives to innovate. Besides, two factors (quality competition and high  uncertainty of market demand) are market related. Finally, in contradiction to our expectations, having well-educated employees has a negative effect on the incentives to innovate.