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This paper explores the relationship between the performance and innovation in Palestinian firms. The main goal was to see the impacts of knowledge creation or investment in shaping innovation at different business components such as product, process, organizational and marketing innovations. This research article used A sample of 110 managers from different Palestinian firms, a self-administered questionnaire was used to get the accurate results. The results showed items in the organizational constructs have positive and strong correlation with each other between r = .463 and r = .654. Organizational constructs also showed positive and strong correlation with marketing construct while weak and negative correlation with product and process construct. However, the findings indicated a stronger correlation existed for manufacturing and services firms between innovation and business performance, the study concluded that both the knowledge creation and investment contribute vitally in shaping the innovation and relationship between innovation and performance of the Palestinian firms.