The paper investigates how firms’ diversification of information sources works as an incentive for innovation. The previous analyses on the role of external information in firm innovation have mostly focused on the improvement of innovative performance which is contingent on many contextual variables, ended in conflicting and inconclusive empirical results. Rather this study attempts to identify and understand the influence of diversified information sources in terms of innovation propensity. It started with simple fact that innovation propensity is dictated by expected returns from innovations and that they are significantly deterred by two phenomena; knowledge diffusion and knowledge obsolescence. These lead to two main hypotheses that specify mechanisms through which the firm’s incentive for innovation is linked with diversified information sources. The first hypothesis claims that diversifying information sources functions as a strategic appropriability measure that blocks the diffusion of knowledge into competitors. The other hypothesis argues that a variety of information source adopted beforehand can diversify risks associated with knowledge obsolescence by minimizing costs incurred from switching to new knowledge base. Furthermore, The differential effect of diversification according to legal dependency of appropriability measure and innovation radicalness is inferred from two hypotheses respectively. The predictions are satisfied empirical tests using a dataset of over 1300 firms across Korea manufacturing industries with strong robustness. Therefore, the two channels that information source diversification induces innovation propensity are established in the paper.