Final answer:
The strongest incentive for innovation is typically found in small businesses, driven by need to compete and grow. Governments can enhance incentives through intellectual property rights and funding support. However, government funding is crucial for research with high externalities.
Step-by-step explanation:
The incentive for innovation of new ideas and products is generally strongest for small businesses. These entities often pursue innovation to differentiate themselves in the market, stay competitive, and grow. Large companies, research and development divisions, government-funded labs, and colleges have important roles in innovation, but the direct profit motive and agility of small businesses frequently make them hotbeds for innovative ideas.
Governments can also increase the incentive to innovate through policies such as guaranteeing intellectual property rights, providing assistance with research and development costs, and encouraging cooperative ventures between universities and companies. However, direct government funding tends to be necessary for research with high externalities, such as in the case of NASA and USDA projects, which might not take place if left solely to private firms.