Innovative activity is performed to a considerable extent in the service sector, namely within the so-called knowledge intensive business services (KIBS). Particularly emphasizing the role of absorptive capacity, we analyze possible determinants of incremental and radical firm innovation using firm micro data from the KIBS Foundation Survey. The results show that access to knowledge through networking and cooperation is of utmost importance for innovative activity in the KIBS sector. Access to knowledge from universities and research institutions is particularly important for radical innovation, notwithstanding the degree of formality of cooperation. In contrast, access to knowledge from clients or suppliers only has a significant impact on the probability to innovate if the cooperation with these partners is based on formal cooperation via joint projects or formal cooperation contracts. Furthermore, we find empirical evidence for a positive correlation between KIBS firms and clients from the manufacturing sector: these stimulate in particular incremental, but also radical innovation.