Studies of the determinants and effects of innovation commonly make an assumption about the way in which firms make the decision to innovate, but rarely test this assumption. Using a panel of Irish manufacturing firms we test the performance of two alternative models of the innovation decision, and find that a two-stage model (the firm decides whether to innovate, then whether to perform product-only, process-only or both) outperforms a one-stage, simultaneous model. We also find that external knowledge sourcing affects the innovation decision and the type of innovation undertaken in a way not previously recognised in the literature.