Slowing productivity growth in the Australian grains industry has led to calls for increasing investment in rural R&D to advance agricultural technology. However, recent research also suggests there is strong potential to increase productivity by enhancing uptake of existing innovations. The productivity gains from innovation adoption are likely to depend on the capacity of farmers to effectively select, adapt and integrate innovations into existing farming systems. In this paper, the innovative capacity of grain growers is characterised by variables related to the farm, the farmer and their operating environment. The influence of these factors on on-‐farm innovation adoption is tested using an ordered probit model. The relationship between innovative capacity, innovation adoption and productivity is then evaluated. The results suggest that building innovative capacity is effective in increasing agricultural productivity.