The paper examines the influence of technological innovations on employment and labour productivity growth of a sample of 72 small and medium enterprises in the auto component sector of Bangalore. Innovative SMEs, engaged in both product and process innovations, could achieve a considerable increase in their sales and employment during 2001-02 to 2005-06. But in the midst of high turnover rates of employees, comprising largely skilled and unskilled workers with a marginal presence of technical employees, the incremental nature of innovations and a significant employment growth, innovation did not have a positive impact on labour productivity growth. Upgrading the quality of innovations, adopting strategies to retain the trained technical/skilled labour and undergoing training in “innovation management” to optimally employ factor inputs are suggested to enable SMEs reap “productive benefits” from their innovations.