Today’s Small and Medium Enterprises (SMEs) are faced with many and complex challenges. Globalization is changing everything. Before, it was usual that SMEs used to be operated in local areas. Most of the input was secured from the local area; whereas, the market was also local and SMEs were competing in the local market. However, it is now obvious that Small and Medium Enterprises (SMEs) are competing in the global market. So, it is necessary to monitor globalization trends and their effects on the sub-national innovation system and SMEs.

The local region often does not have the resources required for the establishment of a SIS and the promotion of SMEs. All available resources are usually clustered around a couple of cities in the developing countries. Therefore, it is hard to get the required input from the local source. Sometimes, the central government puts some resources in the region, but the local government does not have the capability to utilize them.

Technological capabilities are becoming the key competency factor not only for large companies but for small companies too. However, SMEs are not fully aware of this environmental change. The soft infrastructure is also lacking in the local area. For instance, the socio-cultural infrastructure and legal/policy infrastructure are not so much favorable for the SME growth. All these changes seem to have a negative effect on the SME. However, there are many SMEs that use these environmental changes as the opportunities. Certainly, if some SMEs are ready to accommodate changes and grow, they can grow.

For adapting in the changing business paradigms SMEs’ survival mostly dependent on their ability to improve their performance and produce goods that could meet international standards . In other words, a certain level of competitiveness may be felt as a prerequisite for an SME’s survival when dealing with dynamic business conditions.

To compete with global struggle and overcome rapid technological changes as well as product varieties, SMEs must be able to accomplish product innovation. Since small companies are typically lacking of some of the essential resources for innovation they have to acquire that from external sources, such as other companies, technical institutions, etc. Therefore, the management of inter-organizational relationships and networking in general may be critical for the successful development innovation platform in small companies. A large body of evidence shows that SMEs, especially young firms, contribute greatly and increasingly to the innovation system by introducing new products and adapting existing products to the needs of customers.