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This paper explores the main elements that influence innovation and the relationships among them. It is pointed out that innovation results from an entrepreneurial action inside an established institutional context, sustained by resources, abilities and competences and with the support of the necessary financial capital. Therefore, it is proposed that innovation is a function (just as the microeconomic production function) composed of entrepreneurship, institutions, capabilities and capital. Each one of these elements is explored individually, so that later the relationships among them can be analyzed. It is still suggested that the size of the firm is a moderator in the relationship between these elements and innovation. The study’s contribution it is the development of a conceptual model.