This paper investigates whether the existence of knowledge spillovers, differences in the capacity of fi rms to assimilate them and disparities in some human resource management practices are related with the decision to innovate of Spanish fi rms. In order to do this, we employ data from the �Central de Balances� database, which covers both manufacturing and services fi rms during the period 2003-2007, and use an estimator proposed by Wooldridge (2005) for dynamic random effects discrete choice models. The empirical exercise provides evidence on the positive link between spillovers and the innovative behaviour of companies, not just for the knowledge generated in the same industry, but also for that generated in the same region or by the public sector. Moreover, this link is stronger for those fi rms with a higher capacity to absorb those spillovers. This ability not only works through fi rms� R&D capabilities, but also through such factors as the quality of the labour force, the share of temporary employment and the amount of resources spent in training. In addition to these factors, we fi nd that innovation performance exhibits a high degree of inertia. Further, some other observed fi rm characteristics, such as size, sales growth, export behaviour, sector capital intensity or fi nancial structure variables, are also found to be relevant determinants of the likelihood of innovation.