<p>This paper aims to investigate into the extent to which being located in clusters can enhance innovation capability of small and medium-sized enterprises (SMEs). A descriptive research design was adopted to explain the phenomenon. A sample of SMEs located in clusters in Bandung and Jakarta was collected and analyzed by using Partial Least Squares (PLS). The findings reveal that being in clusters does not have a significant impact on firm innovation capability, due to inadequate infrastructure in the clusters. The capability to innovate is primarily driven by organizational intellectual capital, learning capability, and technology orientation. In practice, the Indonesian government need to create better and conducive infrastructure within clusters to encourage localized collaborations that may generate more innovations of SMEs, such as establishing collaborations with multinational corporations. Inducing tax deductions can be found possible enough for the Indonesian governments to attract multinational corporations involve in the clusters and assist SMEs to generate innovations.</p><p> </p><br /><p><strong> </strong></p>