The innovation systems approach considers the ‘business ecosystem’ of an innovating organisation and analyses the flow of information and technology as well as the interactions and relationships between the actors involved, such as enterprises, research institutions and the central and local governments.

A number of key functions have been identified that are essential for the proper operating of an IS. Several variations of IS frameworks have been developed by different authors, ranging from models that differentiate seven key processes to models that identify nine key processes. However, in essence these models have all been based on the same set of seven dynamic functions which are described by Bergek et al., (2008) :

1- Knowledge development and diffusion
This is the function that is normally placed at the heart of an innovation system in that it is concerned with the knowledge base of the global system and how well the local system performs in terms of its knowledge base and, of course, its evolution. The function captures the breadth and depth of the current knowledge base of the innovation system, and how that changes over time, including how that knowledge is diffused and combined in the system.
2- Influence on the direction of search
If a TIS is to develop, a whole range of firms and other organizations have to choose to enter it. There must then be sufficient incentives and/or pressures for the organizations to be induced to do so. The second function is the combined strength of such factors. It also covers the mechanisms having an influence on the direction of search within the TIS, in terms of different competing technologies, applications, markets, business models etc…
3- Entrepreneurial experimentation
An IS evolves under considerable uncertainty in terms of technologies, applications and markets. This uncertainty is a fundamental feature of technological and industrial development and is not limited to early phases in the evolution of an IS but is a characteristic of later phases as well. From a social perspective, the main source of uncertainty reduction is entrepreneurial experimentation, which implies a probing into new technologies and applications, where many will fail, some will succeed and a social learning process will unfold.
4- Market formation
For an emerging IS, or one in a period of transformation, markets may not exist, or be greatly underdeveloped. Marketplaces may not exist, potential customers may not have articulated their demand, or have the capability to do so, price/performance of the new technology may be poor, uncertainties may prevail in many dimensions. Institutional change, e.g. the formation of standards, is often a prerequisite for markets to evolve from “nursing markets” to a “bridging market” up to mass markets.
5- Legitimation
Legitimacy is a matter of social acceptance and compliance with relevant institutions: The new technology and its proponents need to be considered appropriate and desirable by relevant actors in order for resources to be mobilized, for demand to form and for actors in the new IS to acquire political strength.
6- Resource mobilization
As an IS evolves, a range of different resources needs to be mobilized. Hence, we need to understand the extent to which the IS is able to mobilize competence/human capital through education in specific scientific and technological fields as well as in entrepreneurship, management and finance, financial capital (seed and venture capital, diversifying firms, etc.), and complementary assets such as complementary products, services, network infrastructure, etc.
7- Development of positive externalities
The systemic nature of the innovation and diffusion process strongly suggests that the generation of positive external economies is a key process in the formation and growth of an IS. These external economies, or free utilities, may be both pecuniary and non pecuniary.