Many capacity development interventions have been driven by the needs of technological innovation rather than the needs of institutional innovation. However, this article argues that the global challenges of the twenty‐first century call for institutional innovation that entails a very different dynamic of the relations within society. Changing institutions, be it related to societal norms and values, government policies, market incentives, political systems or organisational processes, requires the ‘soft’ capacities of communication, trust building, diplomacy, networking, making sense of messy social situations, political advocacy and leadership. The article concludes by outlining four specific capabilities required for institutional innovation: navigating complexity, learning collaboratively, engaging politically and being self‐reflective.