Prior findings are inconclusive concerning the innovation activities of family SMEs when compared to non-family counterparts. This study overcomes some of these shortcomings by providing a theoretical and empirical analysis of differences between family and non-family SMEs with regard to product and process innovation outcomes as well as R&D Partnerships. Using data of 1.870 SMEs located in Germany in 2011, we argue that the main characteristic of family SMEs is the unity of ownership and leadership when compared their non-family counterparts. Deriving a set of hypotheses from this assumption, we we explore how lower agency costs, local embeddedness, long-term orientation and effective corporate governance structures influence the ability to generate product and process innovations in family firms compared to their non-family counterparts.