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Attempt is made to indentify the major issues of knowledge-based economy, which are facing SMEs in Pakistan. literature review reveals that Small and Medium Enterprises (SMEs) are playing very important role in the development of economy in Pakistan. Despite of the important contribution to economy, SMEs are still facing serious issues. These issues create serious threats for the survival of SMEs in Pakistan. After twenty first century, the economy transformed from production based to a knowledge-based economy. In a knowledge-based economy intellectual capital appeared as a critical factor for the successes of organizations. this research is based on the previous researches’ findings. It is concluded that at the beginning of the twenty first century the concept of intellectual capital has gained a significant attention in a knowledge-based economy. There is no doubt, present economy is a knowledge-based economy and it stand on intellectual capital. Therefore, it is indispensible for SMEs in Pakistan to revolutionize and adopt the concept and applications of intellectual capital in order to dilute the emerging economics challenges. SMEs in Pakistan need to strengthen the concept and applications of intellectual capital in their organizations in order to achieve the competitive edge in the market.