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This research aims to explore information related to SMES innovation based on the sustainable economy in Baubau city in order to formulate solutions for development. SMES innovation is considered to be able to develop human resources with sustainable knowledge, creativity, innovation and the ability to develop jobs. However, the SMES in Baubau City is still not able to give a special predicate for the city. This research uses qualitative research methodology. The primary Data was obtained from research informants consisting of 32 SMES, government authorities, and SMES observer academics. Secondary Data is obtained from various Publication data such as cooperatives and SMES, Industrial and Trade Services, and Central Statistic Agency. The results showed that SMES innovation in Baubau City has not been able to serve as the main supporter of the economy in Baubau city. This is because the industry is more dominate in this city. In the city, Baubau Innovations have limited ability and have problems in their business development. This led to SMES innovations have not been able to provide a distinctive characteristic for Baubau city. The problems faced by SMES in the city of Baubau include capital, raw materials and production factors, labor, transaction costs, marketing, digitalization, and Intellectual Property Rights. SMES based on sustainable economies requires cooperation from various parties to achieve progress in the business world. Not only the government and the MSME actors themselves but also the community need to participate.