Innovation is among the main drivers of industrial developmentleading to economic growth. However, the question triggers that whatdrives innovation? Is innovation driven by specialisation ordiversification? The literature has supported both, the specialisationand diversification as driver of innovation. Therefore, the purpose ofthis paper is to explore the determinants of innovation in Pakistan witha special emphasis on specialisation and diversity. The analysis isbased on the cross sectional data set of 784 firms across 13 differentcities of Pakistan, i.e. Investment Climate Survey (ICS) 2007, compiledby the World Bank Enterprise Group. Our findings have showed thepositive relation between innovation and diversity i.e. diversity isconducive to innovation. On the other hand, specialisation has anegative effect i.e. it hinders innovation in cities of Pakistan. JELClassification: C21, C25, O31, O32 Keywords: Innovation, Specialisation,Diversity, Logistic Regression