The paper examines the relationship between the innovation activity and the firm size.This research administers a questionnaire- based survey developed from the UK Innovation Survey (CIS). The survey covers quantitative and qualitative information addressing the innovation activities in the small and medium sized firms in Egypt during the period 2010-2012. The sample covers manufacturing firms in different regions in Egypt such as north, middle and Upper Egypt as well. The paper uses a logit model to study the relationship between the innovation activity and firm size and an orderedlogit model to study the relationship between the sources of innovation and performance.This paper demonstrates there is a positive relationship between size firm and innovation. The main policy implications of these results are that innovation policies should explicitly identifytheir major objective and target group of firms.