This article attempts to explain how the innovation process is determined by factors external to the firm, whose productivity is calculated and analysed in terms of systemic innovation factors. To that end, it describes the internal innovation capabilities of firms, which explain variations in their productivity across sectors. The productivity of manufacturing firms is constructed using the Abramovitz residual method (social accounting), referred to as total factor productivity (TFP), or the Solow residual. Nonetheless, a number of theoretical problems are avoided, such as the effect of scale, aggregation and the heterogeneity of the factors considered in the model. The TFP of Brazilian manufacturing firms is explained by their internal capabilities and by product innovation in the sector to which they belong, which shows that innovation depends on institutions located within the industry.