The main goal of this final paper is to present the importance of innovation in modern business. In order for companies to survive in the market and strive for progress, they have to invest their knowledge, skills and resources in creating innovation. By doing so, they create added value for consumers, enable the growth and development of the economy, create new jobs and improve the quality of life. Through innovation, entrepreneurs increase their competitive advantage which is a major success factor in the market. It is important to see the effects of innovation activities in small and medium enterprises that represent generators of future economic development. Their innovation potential needs to be constantly encouraged, however it is influenced by various factors such as ownership type, share of highly educated employees, market orientation index, organizational and marketing changes. The focus of this paper will be innovation in the Republic of Croatia. The level of innovation of the Croatian economy significantly lags behind the European average. Entrepreneurs in Croatia consider that high costs, administration, bureaucracy and lack of creativity and innovation as the most common problem when it comes to taking an entrepreneurial venture. As a result of that, the Strategy for Stimulating Innovation of the Republic of Croatia for the period from 2014 to 2020 was formed, which intends to build an innovation system directed towards long-term development and stimulating innovation as a fundamental value of economic and social progress. Through the possibility of practical application, the ICT sector has proven to be a "fertile ground" for the development and encouragement of innovation both in the world and in Croatia. In addition, this paper presents two entrepreneurs who have managed to realized their creative ideas and prove that innovation potential is very important for creating a competitive advantage, and thus the key to success.