Employee wellbeing is vital for their job satisfaction and motivation to achieve the long-term goals of their employers. Organisations provide flexible work arrangements (FWAs) as one of the strategies for attending to employee wellbeing. Despite the motivating role of FWAs, their links with firm level innovation are rarely considered. This study examines the relationships between FWAs and innovation. It also investigates how the competitive environment in which firms operate moderates the FWA-innovation relationship. Drawing upon a rich longitudinal data of 1513 Australian SMEs, our findings suggest that provision of flexitime and flexi-leave encourage innovation as they provide the mental space and diversity needed for knowledge creation, sharing and exploitation. Moreover, high market competition has limited effect on the positive associations between flexitime and flexi-leave, as FWAs, and innovation but attenuates the relationship between job-sharing and innovation. Our findings imply that SME managers should prioritize the provisions of flexitime and flexi-leave to their employees as these FWAs have pronounced effects on firm-level innovation.