This paper focuses on the innovation process in small- and medium-scale industries in developing countries, raking the briquetting (densification of biomass) as a case study. The technical efficiency was found to vary significantly between firms, which can be attributed to the lack of technological capabilities within firms and weaknesses in the external environment. Management skills were found to be weak, which has been identified as the major factor inhibiting innovation within briquetting firms. Institutional support was found to be weak too. The policy issues that had the most influence on the innovation process were identified as import restrictions and financial incentives. Technology is still interpreted as hardware. Consequently, measures tend to focus on these aspects, whereas attention needs to be given to upgrading and modernising entrepreneurs management skills.