Innovation is the introduction of novel things which are useful (or at least intended to be so - history is littered with unsuccessful innovations). Innovation in ideas and in goods, services, and practices, has punctuated human history. Economic planners now tout innovation as the route to technological fixes to the crises of capitalism (for instance achieving environmental sustainability and cleaning up damage), and it is a central element of many policies to increase competitiveness at firm and national levels.
Whether innovation is manly supply-puch (based on new technological possibilities) or demand led (based on social needs and market requirements) has been a hotly-debated topic. One point of view here is that "recognition of demand is a more frequent factor in successful innovation than recognition of technical potential (Marquis 1969)" Certainly the innovation studies literature stresses the role of user-supplier links in facilitating successful innovation.
Innovation in business is achieved through many routes, with much attention having been given to formal research and development. But inovations may be developed by less formal on-the-job modifications of practice, through exchange and combination of professional experience, and via many other routes. The more radical and revolutionary innovations tend to stem from R&D, while more incremental innovations may emerge from practice - but there are many exceptions to each of these trends.
Innovation need not be technological. For instance, when "McDonalds" applied the production line to producing restaurant food. It could use low skill workers to produce food fast. Thus inventing fast food. Today this could be covered by a US Business Method Patent, even though there is no technological novelty.