Abstract: This paper explores the role of human capital development (HCD) in the performance of the labour market in the Sri Lankan Small and Medium Enterprises (SMEs). SMEs represent more than 90 % of the national enterprises and almost half of employment in Sri Lanka yet in most cases they are low-productivity and lack competitiveness because of low levels of human capital investment. Based on a quantitative approach, 383 SMEs in various sectors and provinces participated in the study based on the structured questionnaires directed to the enterprise owners and the present employees.