In recent years, the fashion industry has experienced high-intensity changes that require innovation activities to support operational performance. Although there have been many studies on operational performance, studies on operational performance involving small businesses, especially in the fashion industry in developing countries, are very limited. This study aims to examine the role of knowledge management and product innovation in improving the performance of MSMEs in the fashion industry. Through a hierarchical regression analysis involving 100 MSMEs in Yogyakarta, Indonesia, this study finds that knowledge management and product innovation positively affect MSMEs' performance. In addition, this study also finds the role of product innovation in mediating the effect of knowledge management on the performance of MSMEs. In general, this study has two contributions. First, in light of the scant literature relating product innovation to the connection between knowledge management and performance, theoretically, this study investigates how product innovation mediates the relationship between these two variables. Second, this study provides empirical evidence that can be used to develop policies, to encourage the increased operational performance of MSMEs in the fashion industry, through the implementation of knowledge management and product innovation.