PurposeThis paper explores the role of effective resource and knowledge management capabilities on product innovation capabilities of the small and medium-sized enterprises (SMEs). Specifically, the authors research the role of the human resource investments in the form of employee training in developing firm's innovation capabilities and how SMEs manage these investments when we account for the boundary conditions such as the level of employee education, SME size and the frequency of investments in research and development (R&D).Design/methodology/approachThe authors use survey data conducted by The Centre for European Economic Research (Zentrum für Europäische Wirtschaftsforschung – ZEW). The final sample for analysis includes 983 SMEs from Germany that belong to 13 different industries. The authors use hierarchical OLS regression to test the hypotheses presented in this paper.FindingsThe authors find a positive association between increased investments in employee training and product innovation capabilities in the context of SMEs. More specifically, the authors’ findings support that (1) the relationship between employee training and innovation capabilities is weaker in industries with greater proportion of employees with university degrees, (2) the effectiveness of investments in employee training is lower among larger SMEs than smaller SMEs, and (3) continuous R&D weakens the relationship between training expenditure and innovation capabilities. While on the one hand the authors’ findings contribute to the debate of whether employee training is necessary for SMEs by affirming this notion, on the other hand the authors show that investments in employee training have differing implications for small and large SMEs within boundary conditions. Moreover, these findings have practical implications for the managers of all SMEs in terms of management of their knowledge resources.Research limitations/implicationsThe authors’ research makes important contributions to the study of innovation in SMEs. First, the authors contribute evidence to the debate whether employee training is necessary for SMEs by showing that employee training is particularly important for SMEs that are smaller in size, have lower proportion of employees with university degrees and when they invest in research and development in a targeted manner. The authors also demonstrate that investments in employee training is not a waste, rather such investments can increase the likelihood of survival for many of these firms through its positive impact on product innovation.Practical implicationsFor managers of SMEs, the authors’ findings suggest that while investments in employee training are important, the managers of particular SMEs with above-mentioned qualities should be persistent in such investments and must make deliberate efforts to reap the benefits in terms of innovative capabilities. Unlike large firms, who have the financial means to carry out investments in an abundant manner, SMEs appear to be more enterprising with their scarce resources when we also consider the role of investments in human resources.Originality/valueThe authors’ research makes important contributions to the study of innovation in SMEs. First, the authors contribute evidence to the debate whether employee training is necessary for SMEs by finding that employee training is particularly important for SMEs that are smaller in size, have lower proportion of employees with university degrees and when they do not invest in R&D continuously. The authors also demonstrate that investments in employee training is not a waste, but such investments can increase the likelihood of survival for many of these firms.