This study aims to analyze the influence of knowledge sharing and capabilities of innovation toward competitive advantage in SME GiriloyoArt Batik, Bantul, Indonesia. The subjects are batik craftsmen who are members of Giriloyo Art Batik community. Sampling using non probability sampling technique with purposive sampling, by distributing questionnaires as much as 126 respondents. The analysis used SEM which is operated with Amos 22.0 program. The results of this study indicate knowledge sharing positively significant effect on innovation capability, knowledge sharing have a significant positive effect on competitive advantage, and innovation capability have a positive and significant impact on competitive advantage. Knowledge sharing have a significance positive effect on competitive advantage through innovation capability as a mediation variable with significance of 0.164 <0.268.