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