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This chapter analyses a dataset of 974 urban enterprises with less than ten persons engaged, collected in six major Ethiopian cities. Two main issues are examined: the determinants of innovative performance, and the extent to which innovative firms show more employment growth than noninnovative firms. With regard to the first issue, the chapter concludes that innovative performance in Ethiopia is significantly related to a number of attributes of entrepreneurs and firms. Younger entrepreneurs are more likely to innovate than older ones, male entrepreneurs are more likely to innovate than female entrepreneurs and larger firms tend to innovate more than smaller ones. Regarding the second issue the chapter finds that innovativeness is positively related to growth. Innovative enterprises create significantly more job growth than other enterprises. This positive correlation between innovative performance and growth is observed, controlling for other relevant variables found in the literature, including credit constraints, firm age, firm size, and entrepreneur characteristics. © United Nations University-World Institute for Development Economics Research (UNU-WIDER), 2011. All rights reserved.