Small medium enterprises (SMEs) hold 98.5% of businesses and serve as economy backbone in Malaysia. However, the global competitiveness of Malaysia in innovation has been declined recently. The declining innovation index has been reflected a low level of innovation in SMEs. This study serves as one of the pioneer studies conducted to foster the achievement of Malaysia Master Plan (2012-2020), focusing on a fresh approach to bring SMEs to the next level through innovation. The study aims to examine which innovation factors affect innovation performance, as there are relatively little empirical evidences in previous researches and very little innovative activities in SMEs Malaysia. This study uses quantitative research methodology, 300 sample sets have been collected from Malaysia SMEs and the data was analyzed by using Structural Equation Modelling (SEM). All proposed factors in this study (absorptive capacity, internal R&D collaboration and knowledge sharing) are significantly affect innovation performance, except technology transfer. The findings of this study provide theoretical contribution and practical contribution for small medium enterprise, stakeholder, academic institution, policy makers as well as a reference for government to help SME achieve higher innovation.