Abstract: Innovation is generally regarded as acriticalsuccess factor in sustaining growth and competitiveness of firmsin domestic and global markets.This study aims to investigate the innovation practicesand identify factors that hinder innovation capabilityof Large and Medium Enterprises (LMEs)that are based in the eastern economic corridor of Ethiopia-Dire Dawa. Questionnaires were based on Oslo Manual: Guidelines for Collecting and Interpreting Innovation Data. The data were analyzed using percentage, correlations and meanscore; and presented in graph and tableformat. The results of this study indicate that technological innovation practices of LMEs are remarkably low.Cooperation aimed at using external knowledge with universities and research institutes are alsoweak. Collaborative research is almost nulland their recent cooperation with universities is limited to trainings. Most LMEs don’t have written innovation plans and don’t placeefforts in Research and Development(R and D) except in cement and chemical products producing firms.Firms’ performance is triggered by their efforts in marketing and organizational;andregions’ natural resource. It is also revealed a positive relationship between efforts in internal R and D and being exporter.The major barriers of technological innovation LMEs are: too high cost of innovation, lack of skilled personnel,lack of innovation culture and perceived economic risk; among others.