Competition has two possible contrasting effects on firm innovation. On one hand, competition can force SMEs to innovate to become more competitive. On the other hand, competition can shrink the SME’s market share, revenues, and profit, making it difficult to implement financial-capital-intensive innovations. Using data from a survey of 480 SMEs in the Philippines, this paper found evidence that there is a generally positive association between competition and innovation. The magnitude of the relationship, however, depends on the type of innovation. The type of innovation most strongly associated with competition is improving the production process, followed by improving marketing. It is most weakly associated with introducing a product new to the market and with improving an existing product. There is also some evidence that the magnitude of competition-innovation relationship varies across sectors and firm size.