This research is conducted to examine the diffusion of organizational innovation and its impact on the growth of Small and medium enterprises of Khyberpakhtunkhwa, Pakistan. The study was conducted in the pharmaceutical sector in two clusters i.e. Peshawar and Nowshera of Khyberpakhtunkhwa.A case study research design was adopted for the study and data was collected from through semi-structure interviews. The interview protocol was developed by identifying the themes from the literature review. The protocol was modified slightly after the pilot study of two enterprises and some emergent themes were added to it. The interviews were administered with the different top level managers of each SME. The semi-structure interviews were conducted for primary data whereas the official websites/facebook pages of the firms and non-participant observations were used for secondary data. The research was successful as it established the relationship of diffusion of innovation and SMEs growth as well as put forth some suggestions for making the enterprises innovation friendly. This study also unearthed some barriers and environmental conditions which hinder the diffusion of innovation in SMEs.The study made some methodological contributions as it is the first of this kind in Pakistani perspective.This study offered implications for theory, policy and practice as well as offered some directions for future research.