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The strategic role of design-driven innovation is being increasingly recognized. Many studies show that investments in design positively influence the innovative capacity of firms and consequently their competitive performance. However, few researchers have explored how this relationship comes about. The studies that over the years have contributed to the understanding of design have identified two main barriers: the lack of a common language on design, and poor analysis of the dynamics that characterize the relationship between investment in design and competitive performance. In this paper, we investigate six small and medium-sized enterprises (SMEs) located in the Lombardy region of Italy that have received funding from a policy aimed to develop design innovation capabilities. We identify and discuss five different design innovation capabilities and we analyse their role in mediating the relationship between investment in design and competitive performance.