This report examines the link between human resource management practices and innovation. It is based on a conceptual framework in which "human resource stimuli measures"--Work organisation, working time, areas of training and creativity--feed into innovative capacity or innovation. Of course, having innovative capacity does not necessarily mean that a firm will be innovative. One of the issues of this approach is that, while innovation can be directly observed, innovative capacity is a more abstract concept. The study comprises a survey of firms as well as some case studies, and the survey captures data on innovative capacity through a series of questions relating to a firm's perception of its capacity to innovate. Based on the survey data, the authors find that certain human resource practices do improve innovative capacity (or at least firms' prediction of their capacity) but they have a very weak link with innovation directly. Therefore appropriate human resources practices and the capacity to innovate can be thought of more as necessary conditions for innovation rather than as sufficient. This leads to thinking about the mediating factors that transform the capacity to innovate into innovation. The purpose of the case studies was to throw some light on these mediating factors. Key messages from this report include: (1) Human resource practices, creativity management and knowledge management impact on innovation indirectly through their effect on innovative capacity rather than impacting directly; (2) Three sets of management practices assist the development of innovative capacity: (a) people management; for example, practices such as team-based work organisation, support for training and flexible work practices; (b) the development of a learning culture; and (c) external linkages, especially with educational institutions; and (3) In the case studies the one factor that appears to assist innovative capacity translating to innovation is links with the tertiary education sector. Assistance from universities or the VET system can facilitate training and recruitment and the development of applied research to assist product innovation. (Contains 7 tables, 2 figures and 1 footnote.) [For "Building the Capacity to Innovate: The Role of Human Capital--Support Document," see ED529888.].