This article summarizes the author’s empirical research results on the informal metal small-scale enterprise sector in Penang/Malaysia. The main focus area was the urban small machine-shop sector in Georgetown with less than 20 workers and with electric-powered tools (e.g. lathe or milling machines). The main assumption is that within this sector a differentiation process is taking place which enables some enterprises to cope with modern requirements even from multinational companies and to act as a subcontract base for their needs. This empirical research work provides new insights into the ongoing differentiation process and the innovation capacity within this particular part of the informal sector. The coexistence of a vanishing old (traditional) and mushrooming new (modern) sector of small metal-manufacturing enterprises on Penang Island are the two sides of the medal. It can, however, lead to further consequences for an appropriate development policy and the integrated promotion of small-scale enterprises in general.