This empirical study investigates the internal dynamics of organisational innovation and offers a developmental approach to building the microfoundations of dynamic capabilities for innovation (Teece, 2007; Abell et al., 2008). The study combines theory from the domains of dynamic capabilities and human resource management. The dynamic capabilities framework is located within a macro-level tradition and has not yet developed sufficient understanding of the micro-level organisational strategies which build innovation capabilities (Helfat and Peteraf, 2009; Barreto, 2010). The study, based on a large national survey of employees, represents a unique empirical opportunity to address this research gap. The findings from the investigation demonstrate that organisational innovation strategies are positively associated with innovation outcomes mediated by innovation climate. Outcomes investigated include product and service innovation and proximal employee outcomes such as job satisfaction and commitment (Wright and Gardner, 2003). A notable exception is wellbeing outcomes where the findings suggest a thin balance between challenge and stress so that innovation strategies cannot be seen as resulting in universal win-wins for all concerned (Geary and Trif, 2011; Ehrnrooth and Bjorkman, 2012). The research findings enhance theory development, research and practice. Firstly, the study expands dynamic capabilities theory by outlining a developmental approach to building dynamic capabilities and elucidating microfoundations. It suggests a synthesising model for developing dynamic capabilities from microfoundations to macro level strategic higher order capabilities. Secondly, the investigation contributes to resolving the innovation black box problem (Becker and Gerhart, 1996; Guest, 2001, 2011; Takeuchi et. al., 2007) by demonstrating that innovation climate is an important mediator in the relationship between organisational innovation strategies and innovation outcomes. Thirdly, by analysing the responses of employees, which is rare in the literature (Macky and Boxall, 2007; Felin and Foss, 2005, 2009; Guest, 2011), the findings contribute to an empirical understanding of why and how particular strategies are linked to innovation outcomes and thereby illuminate the critical role of employees in the dynamic capabilities framework.