Abstract:Marked differences exist between the institutional and social context for innovation in the UK and Germany. The question addressed here is how these different contexts impact on the objectives and organisation of innovation in UK and German manufacturing. In particular, we examine the extent to which UK and German plants engage in inter-plant collaboration and co-operation and multifunctional working as part of their innovative activity, and explore the reasons for differences in these patterns of involvement. The investigation is based on a large-scale, comparative survey of manufacturing plants in the two countries In Germany, institutional and social norms are found to encourage collaborative interplant innovation but aspects of the German skills training and industrial relations systems make the adoption of more flexible internal systems more difficult. In the UK on the other hand, the more adversarial nature of inter-firm relations makes it more difficult to establish external collaborations based on mutual trust, but less restrictive labour market structures make it easier for UK plants to adopt multifunctional working. This is linked to differences in attitudes to the property rights and transaction cost problems inherent in innovation.