Virtual teams are being increasingly utilized in industry given their ability to bring together diverse knowledge and experience from individuals who are not geographically proximal. Having a diversity of knowledge within virtual teams is noted to benefit innovation outcomes; however, leveraging the benefits of diversity (both deep-level and functional level) is likely to require a capability to facilitate collaboration among team members. This dissertation examines collaboration capability and absorptive capacity at the virtual team level by evaluating the inter-relationships among the dimensions and their influence on team innovation. This research also tests the impact of team diversity on team innovation with an additional focus on understanding the moderating impact of collaboration capability and the mediating impact of absorptive capacity. Two dimensions of team diversity are examined. The first dimension, deep-level diversity, involves the individual characteristics, values, attitudes and preferences. The second dimension, functional-level diversity, which entails the diversity in functional and expertise backgrounds. Survey data was collected from 166 virtual team members and the validation process revealed satisfactory psychometric properties at the items and the constructs level. A confirmatory factor analysis (CFA) was carried out to determine the factor structure of the hypothesized models, as well as its reliability and validity.