Managing to innovate successfully is one of the key challenges facing modern managers, firms, and governments. The rise to prominence of Japanese keiretsu in recent years has valled into question the effectiveness of traditional western forms of corporate organization. Will the futer favour networks of small innovative firms as in California's Silicon Valley, or will giant integrated firms dominate? Should governments play a role in directing the innovation process or should decisions be left to private enterprise? Firms, Markets and Economic Change draws on industrial economics, business strategy, and economic history to ulluminate these topics. The authors first develop an evolutionary model to show when innovation os best undertaken within firms and when markets are the most efficient way of dealing with change. This is then illustrated by detailed discussion of the effect of innovation on the organization of the American automobile industry in the early years of the twentieth century. The chapters which follow outline the effect of innovation on the organization in the early years of the twentieth century. The chapters which follow outline the effects of consumer preferences and organizational inertia on firm and market organization, and a thorough discussion id presented of the role of governments in advancing technological change. The authors argue that innovation is a complex process that defies neat categorization. Numerous organizational forms may be approporiate depending on teh specific circumstances facing innovators. Thus, government policyshould be to facilitate change rather than direct it since decisions on innovation are best left to the princilpe actors who are familiar with the unique aspects of each case.