This study investigates the role of capabilities, acquired through education and on the job learning, in innovation. It is argued that education enhances learning and innovation because it provides employees with communication and interaction skills, and, more importantly, with abilities to receive, understand and utilize relevant knowledge, and solve problems. These dynamic capabilities are one of the sources of innovation. A dataset of 333 Finnish manufacturing firms is used to estimate the factors that influence the probability of making product and process innovations, and incremental product improvements. The period of study is 1987-91. The estimations suggest that competences and skills acquired through education and work experience are important for innovation. Different types of innovation turn out to be affected by different competences. General level of education is important for product innovation. Technical skills are relevant for both innovation and incremental improvement of products, whereas firm-specific work experience comes into play with incremental product improvements and process innovation. However, process innovation seems to be determined mainly by firm size, instead of competences or industry-specific factors. This suggests that the life cycle stage may be related to the type of innovation undertaken. According to the estimations there are considerable lags involved with the effects of competences on innovation. However, longer time series would be needed to evaluate the underlying dynamics properly.