Diffusion of innovations plays an important role for incremental change leading to sustained development in all societies. The diffusion of an innovation is in fact determined by a stream of improvements in the performance characteristics of that innovation, its progressive modification and adaptation. The local technological capability and indigenous knowledge can contribute significantly to the process of adaptive improvements. This paper hinges briefly upon the interface between innovation and diffusion and the role of adaptive improvements to this effect in the context of promoting technologies in rural micro-industries. Observations made in the paper are based on a sample survey comprising of three phases undertaken recently on a number of small and medium industries (SMIs) covering various districts of Bangladesh. It is found that accumulated indigenous knowledge embodied in local farmers and artisans play a crucial role in innovation–diffusion interaction.