State governments have recently adopted many policies creating competition in service provision. These policies typically are expected to reduce costs and improve quality through organizational innovation. I present an analysis of one such initiative—the creation of charter schools. Using evidence from a survey-based study comparing charter schools and traditional public schools, I explore the relationship between competition and organizational innovation. I find that competition does appear to promote innovative local practices. But the evidence also suggests that competition can limit communication within the practitioner community, which, in turn, can stifle the diffusion of innovative ideas. Thus, policy design for local innovation may be more effective when competition is augmented with state-level strategies that promote inter-organizational cooperation and learning.