Hi,
It's the browser, that needs to work with favicons.
The .ico file format is an image format, that can contain multiple small icons. see
Wikipedia link.
Browser
favicons (most of them) are 16x16 in original size. If the .ico file contains bigger images, they are automatically down-scaled. Down-scaling can use various algorithms, with varying results. ..
So an icon that looks great at 256x256px or bigger, will probably be crap at 16x16 if auto down-scaled. So if you want to have good looking favicons you'll probably want to make them by hand.
Incscape can use SVGs to export pixel images and imageMagic can be used to "pack" them into an .ico file.
have fun!
mario