In knowledge-based economy, intellectual capital and knowledge management is important source of organizational performance and competitive advantage for Small Medium Enterprises (SME). Knowledge management is process to understand organization core
competence through creation, store, compile, retrieval, knowledge distribution, and transform human resource tacit knowledge as a part of intellectual capital. SME‟s intellectual capital and knowledge management can develop internal policy, procedure, decision making processes and
incentive system to evaluate and select commercial innovation. The author‟s aim is to show developed understanding to increase SME‟s competitive advantage based on intellectual capital and knowledge management. In accordance with this aim, the paper highlights a number of issues, focuses on intellectual capital in SME, intellectual capital management in SME, knowledge management in SME, and knowledge management process in SME. Create competitive advantage in knowledge-based economy had shown transform from tangible asset to intangible asset. Implementation intellectual capital and knowledge management gives
separate challenge to SME because requires time and effort before obtained return to investment done, though on the other side SME has time limit because business change moved quickly. Other challenge is most of SME‟s knowledge haves tacit character and will never become explicit, because no time to change it becomes explicit knowledge. SME can develop culture to share knowledge to overcome it, and always has understanding that key asset of organization is human resource. To create SME‟s competitive advantage, intellectual capital and knowledge management requires adequate information technology support, so that implementation of intellectual capital and knowledge management at SME very possible to be done
