For those of you not familiar with Open Source, it refers to software whose source code is freely distributed and modifiable by anyone. This is a radical and popular departure from commerceial software development where the source code is protected by copyright.
Back to the question - on the one hand the answer is no, according to The Economist - "It is unclear how innovative and sustainable open source can ultimately be" and SAP - "Open source will fail to deliver innovation and is more likely to break applications."
On the other hand, the answer is yes, says Wired Magazine - "Open source is doing for mass innovation what the assembly line did for mass production. And Ross Mayfield in an article called, Open Source Innovation says - "Innovation springs from diverse groups with specialized expertise. The greatest breakthrough for open source, IMHO, is applying collaborative methodologies for development. Inherent in collaborative practices is a greater opportunity for innovation than competitive practices."
Most of what I've read disagrees with Mayfield. I on the other hand agree with him.
The Open Source approach itself is a significant innovation in software and product developement in general. However to more completely answer the question whether Open Source generates innovation, lets go "by the book". When I say, "By the Book" I mean to compare Open Source with the generally accepted definition of innovation.
According to Wikipedia the definition of Innovation is: "The process of making changes to something established by introducing something new." There it is...the smoking gun. The true answer whether Open Source can generate innovation, is yes.
Wikipedia's source by the way is quite comprehensieve and have the right set of references. The definition continues on about Sustaining, Disruptive, Incremental and Radical Innovation. Here's what's said about Incremental Innovation - "Incremental innovation is evolutionary innovation, a step forward along a technology trajectory with a high chance of success and low uncertainty about outcomes." Even at the detail level Open Source can be defined as innovative.
The conventional wisdom on product development and innovation is, that in order to succeed you need collaboration across the business....especially when it comes to software development. Actually, I'm stretching. Instead of collaboration they say "Cross Functional Teaming". You need to get marketing, sales, engineering, technology, finance and others collaborating to ensure success at product development and innovation.
In today's environment these cross functional teams are comprised of contractors, customers, specialists and employees sourced from across a company's supply chain and around the world. I can't help but think that the Open Source methodology is ideally suited for any type of product development geared to connected markets.