INTRODUCTION1.1 IntroductionSmall and Medium Enterprises (SMEs) have been identified as one of the growth engines for various countries around the world, as SMEs make up over 90% of all business enterprises . For example, United States, 99.7% (Heneman, Tansky, & Camp, 2000), China, 99% (Cunningham & Rowley, 2008), Europe, 99% (Andreas Rauch & Frese, 2000), Holland, 95. per cent, Philippines, 95%, Taiwan, 96.5% (CY-Y. Lin, 1998) and Malaysia, 99.2% (Man & Wafa, 2007; National SME Development Council (NSDC), 2009; Saleh & Ndubisi, 2006). The data above shows that countries around the world recognize SMEs as a key business sector. Furthermore, the Asia-Pacific Economic Cooperation (APEC) (2002) highlighted that SMEs are considered a support for larger businesses and an important basis for expanding business activities and supporting economic growth. SMEs even provide more jobs than large companies (APEC, 2002; Department of Statistics Malaysia (DOSM), 2007; NSDC, 2009). In summary, SMEs play a vital role and contribute to the economy and are likely to become increasingly important as the economy becomes more global. In Malaysia, SMEs are considered the backbone of industrial development (NSDC, 2009) and provide significant contributions to industrial development. national economy. Hashim (2010) stated that SMEs play a significant role in generating more employment, economic performance, income generation, export capacity, training, encouraging competition, innovation and promoting entrepreneurship, as well as supporting large-scale industries (LSI). Furthermore, Jaswant Singh, director of the Malaysian Industrial Development Authority in Australia (MIDA Australia), informed that paper growth improves efficiency and effectiveness (J. Barney, 1991; Wernerfelt, 1984). However, when examining other variables, researchers have found a significant relationship between human resource management practices (Jimenez-Jimenez & Sanz-Valle, 2008; Nasution, Mavondo, Matanda, & Ndubisi, 2010) and EO (Nasution et al ., 2010) towards organizational innovation. Other studies also found that there is an inconclusive result on the relationship between organizational innovation and organizational performance (Rosenbusch, Brinckmann, & Bausch, 2010). These findings suggest that potential researchers could study the mediating effect of organizational innovation on the relationship between HRM practices, EO, and organizational performance. This further suggests that there is also a moderating effect (managerial ties) on the relationship between organizational innovation and organizational performance.