This study is to analyze innovation in the framework of the “ICT (Information and Communications Technology) ecosystem." Introduction: Internal capability is an essential basis for firms to create innovation which is defined as an integrated ability including technology, human resources, organizational nature, and so on. Traditionally internal capability was referred to as “absorptive capability” which is firm’s ability to reorganize the value of new external knowledge, and assimilate to commercial ends. Thus it determines the competitive advantage of a firm (Barney, 1991). In other words, when firms have external information from outside the firm, they convert it to innovation using their antecedent internal capability. The innovation process is thus thought to be a learning process which consists of four dimensions; acquisition, assimilation, transformation, and exploitation (Cohen and Levinthal, 1990; Zahra and George, 2002). Although there are many literature related to the innovation process of this category, few focus thus for on the role of ICT in the innovation process. Objectives and Method: The objective of this paper examines how ICT elevates firms’ internal capability, and in particular identifies the concrete channels of how ICT influences their internal capability, which is their basis to create innovation. In so doing, this study is to analyze the current ICT use in the firms of the ASEAN economies and examines how ICT contributes to enhance their internal capability and innovation based on the survey conducted to 836 firms in Indonesia, the Philippines, Thailand and Vietnam. Questions asked to firms are related to innovation, ICT use, and internal capability. The method of analysis is as follows. In order to make the concept of innovative capability and ICT use more tractable for empirical analysis, AHP (Analytical Hierarchy Process) was used to make indices of innovative capability and CIT use. With regard to the latter, it consists of two major categories; “internal ICT use” which contains ERP, Groupware, CAD/CAM, and Intra-SNS, and “external ICT use” which includes B2B, B2C, EDI, and SCM. The former contributes to promote efficiency by sharing information and activating communication among different sections of firms, which raises their internal capability and then innovation. The latter contributes to obtain information for innovation from outside the firm, that is, from customers or suppliers through the transaction or distribution network such as supply chain, or from universities and research institutions through the open innovation system. The relationships among innovation, internal capability, and ICT use are estimated by using instrumental regression models, or two-stage least square (IV2SLS) in order to avoid the endogeneity problem. Results and Conclusion: Results obtained are summarized as follows: (1) Internal capability promotes innovation; (2) ICT use (both of internal and external) also significantly promotes innovation, and (3) ICT use also significantly enhances internal capability. It should be noted that due to the estimation method used, these relationships are proved to be causality, not simple correlation, that is, ICT is cause, while internal capability and innovation are results. This study also identified the following exact ICT use and the channels of how information is transferred to firms and assimilated inside the firm to innovation; (1) It is using groupware that knowledge creation for innovation inside the firm is prompted; (2) through the distribution network such as SCM, information required for innovation is obtained from outside of the firm. As a conclusion, ICT use is thus demonstrated to enhance innovative capability and innovation through the above channels