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The purpose of this paper that determine whether the intellectual stimulation can influence innovation which is mediated by knowledge sharing, and whether innovation can improve a firm's performance . The model tested on the 56 owners of small and medium enterprises (SMEs) in Tegal, Indonesia. Utilizing purposive sampling technique, with the follwing criteria, company has a workforce 5 to 100 people, engaged in the metal and machinery industry, not including to foreign-owned companies. Softwaredoi:10.7763/ijssh.2013.v3.274 fatcat:jpkhyjtbj5f3zla3df5q7f67c4