As the experiences of newly industrialized economies have shown, R&D and knowledge diffusion can play a crucial role in spurring the innovation capacity and productivity of emerging economies. Using firm level manufacturing data from 2003 to 2007, this paper investigates whether R&D intensity and various channels of knowledge diffusion affect productivity in Turkey-one of the fastest-growing emerging economies of the past decade. We find that an increase in the foreign ownership share in firms and technology licensing increases firms' productivity-although the conditional effect of the latter is significant only above a threshold of technological capability. Moreover, an increase in R&D intensity raises productivity only in firms with a threshold of technological capability, while industry level R&D spillovers do so only in firms with above average technological capability. These results support the view that emerging economies such as Turkey would benefit greatly from investing in technological capacity building, technology licensing as well as from attracting greater foreign direct investment.