Building innovation capability: The role of top management innovativeness and relative-exploration orientation

•Top management innovativeness results in superior firm performance.•Relative-exploration orientation plays a key mediating role.•Firm resources foster managers' innovativeness transformation.•Industry competition reduces managers' motivation in promoting aggressive innovations.

Firms strive to develop innovation capabilities that help them achieve competitive advantage in the marketplace. This paper shows that managers can contribute to firms' innovation capabilities by involving themselves directly. Based on a unique multi-source (shareholder letters, COMPUSTAT, and World Bank Database) dataset covering 335 firms over nine years, empirical analysis reveals that top managers' innovativeness makes them more likely to adopt exploration orientation over exploitation orientation in innovation. This relative-exploration orientation is a key mediator that can transform top managers' innovativeness into better financial performance, and the effectiveness of this mediating role is contingent on a firm's resources and the industry environment.