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The small and medium-sized enterprises (SMEs) play an important role on the growth of the econ-omies of developing countries. In Pakistan, SMEs hold about 90 percent of the total businesses in-cluding the textile industry. The performance of SMEs in the textile industry is influenced by sev-eral factors including the internal capabilities of the firms. Hence the primary objective of the study is to examine the relationship between the internal capabilities namely Innovation Capability, Absorptive Capacity and SMEs Performance among textile firms in Pakistan. The study is conducted using quantitative research. There are 377 questionnaires distributed among textiles SMEs of Pakistan and they were analyzed using some statistical tests. The results reveal that innovation capability and absorptive capacity influenced the performance of SMEs, positively.