Drawing on the capability-based view, we provide new theoretical arguments related to innovation capabilities rather than realized innovation output in firms with family involvement. We focus on technology-based product innovation capabilities and use data from a sample of 119 German manufacturing firms to show that family involvement is positively related to dynamic innovation capabilities. Specifically, the degree of family involvement, which describes the owner family's ability to influence firm behavior, is positively related to sensing innovation opportunities and to transforming a firm's innovation processes, while it is insignificantly related to seizing innovation opportunities. The findings suggest that dynamic innovation capabilities are an important characteristic that differs between firms with varying levels of family involvement.