Theorists have described innovation as the ability to develop and reform the business idea and concept of a firm through changes in the market, firm, competencies and business system. The purpose of this conceptual study is to investigate innovation and competitive advantage, and its inter-relationships within the manufacturing industry sector in Yemen. The main conclusions from this particular study are that innovation is very important regardless of manufacturing industry; and that innovation has a greater effect on how a business should be structured in firms. However, scholars are now paying growing attention to the possibility that the collective capability of innovation plays a key role in determining a firm’s competitive advantage. The purpose of this paper is therefore to fill gaps in the manufacturing innovation and competitive advantage literature, especially by providing insights into the relationship between innovation and competitive advantage in manufacturing enterprises, in Yemen and the Middle East, and the economic development of developing countries worldwide.