Today, the absence of independent innovation in Chinese firms is usually attributed to the lack of “independent innovation capability”. However, this can’t explain the truly basic capability for innovation activities, but rather falls into the dilemma of “explaining capability with capability” by simply combining “innovation” with “capability”. To make up for the lack of explanatory logic, the capability associated with firms’ innovation should be explored at the more micro level of cognition and structure which firms’ innovation activities significantly rely on instead of the usual exploration at the level of general organizational behavior and its results. As a typical activity of “creative destruction”, innovation is usually characterized by changing the existing status of technology or management, which doesn’t rely on the tautological “innovation capability” but a more comprehensive capability—dynamic capabilities. The theory of dynamic capabilities was developed more than ten years ago, but there is still no consensus about the nature of dynamic capabilities. The main reason is that the researchers have mainly paid attention to the level of organizational behavior and its result, but have ignored the foundations of organizational behavior in their search of the nature of dynamic capabilities. From the perspective of internal structure, dynamic capabilities, as an organizing capability dominated by controlled process and supplemented by automatic process in the organizational information processing, requires a comprehensive knowledge base to construct its cognitive basis. From the perspective of external structure, on the other hand, dynamic capability, as an important basis for an organization to effectively and continuously adapt itself to the dynamic external environment, also requires an appropriate organizational structure for a more effective and flexible reconstruction of organization resources in order to ultimately achieve a dynamic matching of internal resources and external environment. The knowledge base of a firm is its cognitive base, while the main feature of its organizational structure is its organizational modularity. Thus, in order to have a deeper insight into the capability basis of firm’s innovation activities, this paper first and foremost analyzes the dynamic capabilities, knowledge base and organizational modularity, on which dynamic capabilities rely. Based on a sample of high technology firms in China, the empirical results show that dynamic capabilities are the capability basis of firm’s innovation activities, organizational modularity is the structural foundation of dynamic capabilities, and knowledge base is the cognitive foundation of dynamic capabilities. Moreover, dynamic capabilities play a mediating role not only between organizational modularity and innovation performance, but also between knowledge base and innovation performance. This research has a theoretical contribution to the current research on innovation and dynamic capabilities, and it will be also of great help for firms’ technological innovation practice.