To cope with changes in society and in the economic system, innovation is an opportunity for small businesses to overcome their initial scarcity of resources. This paper seeks to theoretically explain the capability to innovate using three levels of analysis: (1) on the individual level, actions, action regulation and individual goal setting and their relevance within innovation processes are considered, (2) on the group level, the innovation process is modeled according to Farr (2002), and (3) on the organizational level, determinants and concepts, which link individual action and innovation processes, are discussed. In practice we think that especially facets of individual action and organizational feedback need to be considered carefully, to increase innovative potentials in small businesses and to encourage multilevel organizational learning. Then, small businesses create integrated knowledge of their own innovation processes as a foundation for systematically evaluating and optimizing innovation potentials.