Based on literature review and case studies, this paper first analyzes the reasons for the slow enhancement of the innovation capability of Chinese enterprises. It then analyzes how the dynamics of strategies and organizations act on innovation capability. A dynamic system model is built up from this analysis. The simulation results of the model show that an important reason for the lack of innovation capability of Chinese enterprises is that their short-term performance goals erode their strategic goals. By setting lower performance goals to break the vicious cycle of performance and innovation capability, enterprises will form a virtuous cycle of mutual reinforcement. A more feasible method is that the enterprises, through adjustments and changes of the organizational structure and incentive system, set up a resource allocation principle which gives priority to capability so as to fundamentally ensure the priority of strategic objectives and quick upgrade of innovation capability.