| Summary: | Abstract Innovation is seen as a key capability for maintaining competitive advantage, creating value for customers, and capturing a larger share of the market. Yet, empirical evidence on the impact of innovation on firm performance is mixed. This research adds to the current debate on the relationship between innovation and the economic performance of firms. It brings new evidence from a small European economy (i.e., the Slovak Republic). We use a unique data set on 170 firms supported by the European Structural and Cohesion Funds (ESCF). Actual economic data reported in companies’ annual accounts, rather than self-reported information, is used to follow firm performance over a longer term horizon. The most significant finding is that the company’s innovation strategy was a key mediator of capability development and, ultimately, economic performance. The importance of specific innovation strategies varied over the innovation cycle. Simple process and organisational innovations were perceived to be important when assessing the immediate effects of European assistance. Investment in and cooperation on R&D&I became important when assessing firm performance over the longer term. The research expands the current body of literature on innovation capabilities and economic performance. It accentuates the need for a long-term perspective on innovation capabilities. To maintain a competitive advantage, a company's innovation capabilities must be constantly aligned with the changing environment.
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