This paper discusses the possibilities of inculcating an innovative culture in small and medium size enterprises (SMEs) in the informal sector of Sri Lanka economy within the framework of competitiveness.   The number of  SMEs and employment therein of Sri Lanka has been growing and currently two-third of workforce are employed in this SMEs sector.  The Government of Sri Lanka finds this issue as challenging because it has the obligation of providing social security, work security and employment security for all those who are employed in these SMEs of the country.  Achieving inclusive growth remains another challenge for the Government as income distribution has been getting widened over the years.  The paper discusses the ways and means of improving competitiveness among SMEs of the informal sector through new product innovations which is crucial for inclusive economic growth of Sri Lanka.    The suggestions of innovation points and strategies that are discussed and included in the paper may be useful for policy makers of responsible agencies, administrators of key agencies, the private sector enterprises and chambers, the academia for teaching purposes and for the researchers for further research in this sector.

KEY WORDS: SMEs, Informal Economy, Competitiveness, Industry Sectors, Innovations