Innovative resources and capabilities have been found to be essential to climb up the value chain in most industries. However, development of innovative resources and effective deployment of these resources requires significant investments on a sustained basis, which is a difficult task for domestic firms in many emerging economies, especially if they operated with obsolete technologies under protected regimes for long periods of time. To understand how and what type of resources and capabilities are developed in emerging economies, which are going through institutional transitions from protected to liberalized regimes, we examine various management theories and propose a conceptual framework that integrates relevant theories and helps us study the process of resource and capability development. Based on the existing literature on resource based view and dynamic capability approach, we also frame certain hypotheses on innovative resources and capabilities and their impact on firm performance. We collected primary and secondary data from the Indian auto component industry to test these hypotheses and carried out detailed interviews with industry experts to understand the industry dynamics and the results from our data analysis. We use the proposed conceptul framework and qualitative inputs from industry experts to explain our empirical results which provide very interesting insights into the selection and development of innovative resources and capabilities by the emerging economy firms and their impact on various measures of firm performance.