The factors affecting innovation have been largely investigated in the context of industrialized or large developing countries. Innovation is, however, equally important for small developing countries also. It is argued in this thesis that the context of innovation in such small economies is sufficiently different to justify research into the relative potency of factors influencing innovation and the practice of innovation management. These differentiated innovation practices will also have repercussions for the national innovation policy of a small developing country. The present research was conducted in Cyprus, a small developing country. A large number of manufacturing small and medium sized firms (n =140), were surveyed, during 1995, via a questionnaire administered during personal interviews with the firms' owners or managers. The survey was complemented with more extensive case studies of a subset (n = 25) of the survey sample of firms. A research model based on the antecedents approach was used in the survey research and the data were subjected to various statistical analyses including multivariate techniques. The results indicate that the SME owner/manager plays a central role in innovation, influencing directly and indirectly the main variables affecting innovation. From the multivariate analysis these factors include: strategy, expenditure on R&D, cooperation with external technology providers, use of technological information sources and overall performance of the firm. The case material supports in general these findings and also emphasizes the importance of government policies for innovation. The importance of networking for innovation was partially confirmed, in terms of the cooperation with technology and information providers. However contrary to expectations and literature claims, horizontal networking (cooperation within the sector) was not found important for innovation. Based on these results a number of practical suggestions are offered to both industrial managers and policy makers. It is believed that these suggestions are relevant, not only for Cyprus, but also for other small developing countries.