In today’s rapid changing and highly competitive business environment, innovation is broadly recognized as a powerful competitive weapon. Innovation is a dynamic process that needs continuous, evolving, and mastered management. Thus, companies need to monitor and measure their innovation capacity to manage the innovation process. Yet, there is lack of a psychometrically valid scale for innovation capacity construct in the current innovation literature. The purpose of this paper is to develop a reliable and valid scale of measurement for innovation capacity. To test its unidimensionality, reliability, and several components of validity, we used data collected from 175 small- and medium-sized enterprises (SMEs) in Iran and performed a series of analyses. The reliability measures, exploratory and confirmatory factor analyses, and several components of validity tests strongly support a four-dimensional scale for measuring innovation capacity. The dimensions are knowledge and technology management, idea management, project development, and commercialization capabilities. 1. Introduction Rapid changes in technologies and globalization process altered the former rules of competition and innovation becomes more and more essential for companies to remain competitive [1, 2]. Innovation in the form of new or improved products and processes can be an important source of market and cost advantages for a firm, and it also can increase demand by product differentiation and enhance the firm’s ability to innovate [3]. Innovation is different from generating an idea or a method of doing works. Instead, innovation should be regarded as a sustainable and continuous process [4]. Companies have to commit to permanent and concurrent innovation creation as it is the critical driver in search for competitive advantage [5]. Continuous innovation creation, in fact, becomes reality for a company through an on-going and dynamic process of developing and improving new or existing products, processes, technologies capabilities, and management practices [4]. Based on the dynamic nature of innovation process, assessment of the innovation capacity becomes a key concern to ensure continuous development of these management efforts [2]. The issue of quantifying and assessing innovation process and its practices is an important and complex issue for many companies [6]. An important challenge is to measure the complex processes that affect the organization’s innovation capacity, in order that they can be optimally managed [7]. Measurement of the innovation capacity is critical for both
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