The author has designed, developed and applied, employing a system dynamics approach, a new innovation system concept - the Creative Factory - in order to communicate innovation theory to the different actors in the system using a common perspective and to reveal the complexity of innovation systems. Furthermore, the model aims to create a dynamic framework that can be used to analyse and assess the innovation activity of a firm against best practice and to illustrate, through simulation, the short and long-term influences of managers' decisions or external factors on innovation outcomes and between the different factors in the system. The concept has at its centre the firm's knowledge creation, the new product design and development process and the competencies that separate successes from failures. These core elements are affected by other business activities of the firm such as the corporate strategy, the risk taking policy and the organisational structure. Additionally, it is influenced by the National Innovation Environment within which the firm operates. The creative factory model has been used in this project as an assessment tool in three different firms. Then, action-scenarios are simulated, which demonstrate how to improve and control the innovation activity of these three firms. Additionally, the author designed scenarios in order to demonstrate the effects of external influences on the innovation activity of the firms. Studying the results of the creative factory's simulation, the interconnection between the elements of an innovation system is illustrated. The need for capital investment in research in parallel with organisational improvements is shown to be a key factor for the success of the innovation process. The importance of the early stages of the new product design and development process in the overall performance of a firm is demonstrated. Finally, the influence of the national innovation environment on the innovation process and on the related business activities is identified.