One key factor is definitely environmental dynamism: the frequency of changes, and intensity of changes. You could go through "The role of entrepreneurs in firm-level innovation: Joint effects of positive affect, creativity, and environmental dynamism" (Baron & Tang, 2011) for an overview.

I would agree with the view, that most innovations are purely 'market driven'. If the market 'requieres' innovations - SMEs simply need to to adjust to survive on the market. The market pressures is the most important factor. No state policy would ever be so effective in this case.

SMEs nowadays have to fight for survival. There is increased competition both from other SMEs and large corporates, such that there is no room for relaxation. This has forced many SMEs to upgrade their systems of operating. With increased globalisation, there is an automatic need to engage in innovation to suit world prices and quality standards of products. However, some SMEs are still constrained by many factors which include funding (cheap loans) and government support.

http://dx.doi.org/10.2139/ssrn.2466031

Entrepreneur confidence on the new innovation arising from behavior of target market influence adoption. As a result demand driven innovations is created which in turn pull its adoption. It is therefore customers demand for products of an innovation which influence producers/entrepreneur demand for that innovation.  

To Owen: not really. Ever heard of supply push (Schumpeter) where supply creates its own demand (who needed a walkman, an iPod or a smartphone?). Innovation then is the key to create a new market where first come (often a SME) has the classic advantage. Then demand adopting the innovation creates the "real" market.

To Sumukh: difficult to answer as emerging markets have hindrances varying from country to country (purchasing power of the targeted customers being one, access to capital, infrastructure for distribution, skilled or unskilled labor being factors among others). However, looking back at Japan, South Korea and Taiwan (or today at China, India, or Brazil), SME  in a steadily growing economy are "condemned" to innovation and increased productivity, squeezed between their sources and their clients. Either they are dependent on big corporations to buy their products and are "price takers" or they compete with other SMEs for tiny market shares and must be price competitive if they cannot play on the quality of their products to justify a higher price (see the story of Apple). SMEs often struggle to find a product that will be a "cash cow" and enable them to water down business cycles, others focus on extremely narrow but unique product where they are the only purveyor, but all have to innovate to survive.

You can be interested in the enclosed paper; regards, MV

To: Hungund: it's contribute economic growth, creating market value and competitive advantage, and business growth .

To Schmiegellow: I am agree that innovation creates the "real" market, and I would like add note that innovation is a part of SMEs.

i think empowerment is the key factor to adopt innovation by SMEs. you can refer to prof. Dr. Mohd. Khairuddin Hashim books published on SMEs and Innovation in  UUM, Malaysia.

It depends on the theoretical strands of your perspective. Say you look into the issue from the institutional perspective, it could be explained by institutional variables and the need for legitimation 

In these countries, the disposable income most of the times is low and these SMEs must be innovative to give them a low operation cost. Too much competition makes them innovate to have a competitive edge to attract customers. Thirdly, it is a governmental policy in some developing countries to grow the economy from the micro-level as opposed to the macro-level

Looking at countries in southern Africa, SMEs need start-up capital and financial skills to be innovative.  Many do start without any capital and the "hope" for angel investors and government support.  If these do not come along, SMEs fail to survive a year or 2.  Without start up capital and financial skills they cannot be innovative in new markets environment.

In addition to several factors mentioned above (demand capacity, monetary and fiscal conditions, institutional financial supports, etc), we must state the importance of strong intellectual property right protection regime. Of what use will it be to a profit-driven entrepreneur if his intellectual property, an innovation,  is not protected (stolen)?

Please see attached articles.  We also have a chapter pending which addresses the chart "Triggers, Drivers and Supporters", with IGI Global.

In addition to my point above, you will observe that Adjustment to new political environment as an issue for SMEs in sub-Saharan Africa.  Another challenge for innovation is clusterism.  Many scholars identify that SMEs compete for the same small market and over congested market.  In simple terms, this builds into SMEs in Africa south the Sahara operating in clustered industrial markets. 

Reference suggestion - Parker, R.L, Riopelle, R and Steel, W.F 1995. Small enterprises Adjusting to Liberasation in Five African countries. World Bank Discussion Papers Africa Technical Department Series

Yoshino, Y 2011. Industrial Clusters and micro and small enterprises in Africa: from survival to growth

https://books.google.co.za/books?id=bs-Vu5MXEJ8C&printsec=frontcover&dq=Industrial+Clusters+and+Micro+and+Small+Enterprises+in+Africa.++From+survival+to+growth&hl=en&sa=X&ei=eJarVLzxFIq0UbKJgaAL&ved=0CB8QuwUwAA#v=onepage&q=Industrial%20Clusters%20and%20Micro%20and%20Small%20Enterprises%20in%20Africa.%20%20From%20survival%20to%20growth&f=false

You can be interested to the enclosed article; regards, MV

Sumukh,

Interesting question

This paper explores some elements of your enquiry

https://www.researchgate.net/publication/299747565_Towards_a_talent-driven_outward-oriented_globally-competitive_SME_framework_Discussion_Paper

Technical Report Towards a talent-driven outward-oriented globally-competitiv...