The aim of this paper is to clarify factors that promote innovation upgrading of regional SMEs and to analyze why and how policy programs implemented by local government affect their upgrading. This study is based on a firm-level questionnaire survey conducted in 2014 that targeted 1324 SMEs in Hyogo Prefecture, Japan. Innovation upgrading was classified into four stages depending on the novelty of the technology used and products; the novelty is classified according to whether they were existing or new. Measures of upgrading include the ratio of research and development (R&D) investment to sales, open innovation, sources of ideas, problem solving ability, human resource development (HRD), and business development strategies. An ordered probit model was employed. Six policy programs of Hyogo Prefectural Government were analyzed. The Manufacturing Academy was seen to be significant, and how this policy program affects upgrading through factors inside SMEs was examined by introducing cross-terms of policy programs and measures. Estimation results demonstrated that this policy program enhanced upgrading through HRD in SMEs, and it is considered that this was due to the policy programs meeting the necessity that SMEs have to develop the skills and abilities of their engineers and workers. •The factors that enhance innovation upgrading were identified by a questionnaire.•A model of innovation upgrading is constructed and estimated by ordered probit.•Open innovation, R&D, sources of ideas, HRD, and managerial strategy were extracted.•Regional industrial policy programs that are significant for upgrading were identified.•The above policy programs contribute to upgrading through the HRD activities of SMEs.