Strategic Management Journal Strat. Mgmt. J., 31: 892–902 (2010) Published online EarlyView in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/smj.841 Received 6 July 2006; Final revision received 18 December 2009 RESEARCH NOTES AND COMMENTARIES INNOVATION PRACTICE AND ITS PERFORMANCE IMPLICATIONS IN SMALL AND MEDIUM ENTERPRISES (SMEs) IN THE MANUFACTURING SECTOR: A RESOURCE-BASED VIEW MIL ´ E TERZIOVSKI* Department of Management and Marketing, Faculty of Business and Economics, The University of Melbourne, Victoria, Australia Small and medium enterprises (SMEs) in the manufacturing sector make a significant contribu- tion to economic growth, yet most of the research into innovation management in the manufactur- ing sector has focused on large organizations. This article, however, identifies innovation drivers and their performance implications in manufacturing SMEs. Its study gathered survey data from a sample of 600 Australian SMEs and found that SMEs are similar to large firms with respect to the way that innovation strategy and formal structure are the key drivers of their performance, but do not appear to utilize innovation culture in a strategic and structured manner. This study therefore concludes that SMEs’ performance is likely to improve as they increase the degree to which they mirror large manufacturing firms with respect to formal strategy and structure, and to which they recognize that innovation culture and strategy are closely aligned throughout the innovation process. Copyright  2010 John Wiley & Sons, Ltd. INTRODUCTION Small and medium enterprises (SMEs) are dif- ferent from large organizations. These differences primarily relate to such defining SME characteris- tics as a reactive, fire-fighting mentality, resource limitations, informal strategies, and flexible struc- tures (Hudson, Smart, and Bourne, 2001; Qian and Li, 2003). As a consequence, they tend to have Keywords: innovation; performance; strategy; SME; model; manufacturing *Correspondence to: Mil´ e Terziovski, Department of Manage- ment and Marketing, Faculty of Economics and Commerce, The University of Melbourne, Level 10, 198 Berkeley Street, VIC 3010 Australia. E-mail: milet@unimelb.edu.au a failure rate higher than that of large organiza- tions. The United States Small Business Admin- istration (SBA) found that 24 percent of all new businesses in the United States failed within two years, and that 63 percent failed within six years (Wheelen and Hunger, 1999). Lu and Beamish (2001) observed similar failure rates in Australia, the United Kingdom, Japan, Taiwan, and Hong Kong. Wheelen and Hunger (1999) found the high failure rate to be largely due to informal strategic planning processes and a lack of systems to keep track of the SMEs’ performance. SMEs in the manufacturing sector are also con- fronted with increased competition from cheaper manufactured products from such countries as Copyright  2010 John Wiley & Sons, Ltd.