This study aims to identify the factors that contribute to the building of a firm’s innovative capacity and to assess the way in which this contributes to our understanding of how much this contributes to improvements in the firm’s performance. A conceptual model is proposed consisting of five separate dimensions: the firm; the entrepreneur; the external business environment; the firm’s innovative capacity; and the firm’s performance. The study was based on questionnaire-based data from a sample of firms drawn from the manufacturing industry in the Beira Interior Region of Portugal. The results provided evidence regarding the factors influencing the innovative capacity of firms and permitted conclusions to be drawn regarding effects of superior innovative capacity on the construction of firms’ competitive advantage, which in turn contributes to improved performance.This study aims to identify the factors that contribute to the building of a firm’s innovative capacity and to assess the way in which this contributes to our understanding of how much this contributes to improvements in the firm’s performance. A conceptual model is proposed consisting of five separate dimensions: the firm; the entrepreneur; the external business environment; the firm’s innovative capacity; and the firm’s performance. The study was based on questionnaire-based data from a sample of firms drawn from the manufacturing industry in the Beira Interior Region of Portugal. The results provided evidence regarding the factors influencing the innovative capacity of firms and permitted conclusions to be drawn regarding effects of superior innovative capacity on the construction of firms’ competitive advantage, which in turn contributes to improved performance.This study aims to identify the factors that contribute to the building of a firm’s innovative capacity and to assess the way in which this contributes to our understanding of how much this contributes to improvements in the firm’s performance. A conceptual model is proposed consisting of five separate dimensions: the firm; the entrepreneur; the external business environment; the firm’s innovative capacity; and the firm’s performance. The study was based on questionnaire-based data from a sample of firms drawn from the manufacturing industry in the Beira Interior Region of Portugal. The results provided evidence regarding the factors influencing the innovative capacity of firms and permitted conclusions to be drawn regarding effects of superior innovative capacity on the construction of firms’ competitive advantage, which in turn contributes to improved performance.