Innovation in an organization is importance, because it is the key to compete in this globalization era. Especially for small and medium enterprises that need to compete with large companies. There are some views that if the model management of knowledge (tacit knowledge) is good then it will affect the innovation of an organization. In addition to manage the management of knowledge, wealth (intellectual capital) of an organization that is invisible is also an important factor for innovation of the organization. This research is done to find out the influence of the management of knowledge and intellectual capital of an organization towards innovation of an SME. This research is conducted to analyze the effect by using the results of the questionnaire and then processed using SEM software Partial Least Square (PLS).
The result of data processing based on the result of the PLS software shows that tacit knowledge does not affect the innovation, due to the lack of attention from SME Karya Kulit to develop knowledge of each employee that resulted in difficulties to give ideas or innovation. Result for Intellectual Capital which affect the innovation can happen because the owners of SME have unknowingly implemented or considered factors of Intellectual Capital at every process in SME.