Small and Medium Enterprises (SMEs), although a vital component in fostering economic growth of a country, failed to rise to its full potential due to various challenges. In the SME Masterplan 2012-2020, the government of Malaysia has outlined six of these challenges: human capital development, access to financing, market access, infrastructure, innovation and technology adoption, and legal and regulatory environment. This paper seeks to study one of the challenge, innovation and technology adoption, and determine its effect on the performance of the SMEs in Malaysia. Data was collected through a survey to Malaysian SME manufacturing companies yielding a response from 152 companies. Results indicate a significant relationship between innovation and technology adoption challenge and company performance.