The majority of companies in Taiwan are SME (Small and Medium Enterprises), which accounts for over 95 percent. It is normally recognized as a positive characteristic since it symbolize the diversity of industries, comparing with countries that have a few company control the whole industry. However, it gradually turns into a problem when it comes to management, especially on innovation issues. With the increasing effect of globalization, innovation capability becomes an influential factor in competition, which marks the creativity and vitality of a company. SME of Taiwan, on the other hand, are now facing a problem on innovation capability, which is resulting from the leading style and management of traditional companies in Taiwan, paternalism. Thus, the research is conducted in order to have clearer understanding of the issue. The study investigate whether trust and knowledge sharing play important roles on affecting innovation capability and business performance in Taiwan’s SME. As a result, the researcher developed the TKIB model in order to examine the variables of the study. For research samples, the researcher successfully collected 168 from employees of SME in Taiwan. 180 questionnaires were distributed and the final response rate is 93 percent. After the study, it is proved that trust and knowledge sharing indeed affect innovation capability and business performance significantly. Furthermore, knowledge sharing plays the role as the mediator here while trust also critically affects knowledge sharing in the process. Recommendations of SME and details of conclusion are provided in the study.

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