From the LiteOn FAQ:
Q: What exactly is firmware and how is it different from device drivers?
A: Your burning software, your operating system, and your device drivers are all software. They are all programs that reside on your computer. Your optical drive, of course, is the hardware. However, the software does not interact directly with the hardware. Windows does not directly control the motor in the drive, for example. There is an intermediate element called the firmware (it's somewhere between software and hardware, hence the name). The firmware is a piece of special software that resides on a chip inside the drive and does NOT reside on your computer. Thus, the firmware is always there, with the drive--you can move the drive to a different computer or wipe out your hard drive, and the firmware will still be right there. When your computer communicates with the drive, the commands are intercepted by the firmware, and it is the firmware that ultimately controls the drive's tray, motor, laser, etc.
So as you could see, the firmware is perhaps the most important thing, aside from hardware, that governs the performance of the drive. By modifying the firmware, you can get the support more media types, to write or read certain media faster than it otherwise would, and to utilize the drive's hardware to its full potential.