Sri Lanka is the third largest tea exporter in the world, but nearly 60% of its total exports are comprised of bulk tea. Bulk tea secures the lowest prices in world tea market. Sri Lanka earned an average value of US$4.83 per kilogram from 2014 to 2018 for its tea exports, compared to US$24.24 per kilogram over the same five-year period in Japan, a highly innovative tea-producing country. The objective of this study is to examine the root causes of product innovation in Sri Lanka, as compared to Japan, by conducting a historical analysis followed by a survey and key informant discussions. Sri Lanka has mainly focused on incremental innovations in blending, flavoring and packaging than radical innovations. About 98% of the tea produced in Sri Lanka is black tea, produced mainly in large scale-processing factories. The focus on economies of scale and heavy dependence on traditional product baskets and market destinations have bottlenecked product innovation capabilities in Sri Lanka. In contrast, Japan produces a large number of innovative beverage and non-non-beverage products. Their main beverage type is sencha (58%), followed by many other beverages including gyokuro, kabusecha, matcha, tamaryokucha, black tea, oolong tea, fermented teas and white tea. The Japanese produce a variety of non-beverage products including confectionaries, snacks and cosmetics made from same tea plant that beverage tea is made from. Having a large number of processing factories (4698), Japan’s product innovation capabilities are mainly attributed to firm-level factors and support services. This study recommends that Sri Lanka should link together farmer organizations, processing factories, research institutes and universities to make its tea industry more innovative and flexible and consequently more profitable and sustainable. Foreign direct investment and partnerships presumably would be instrumental in bringing in much needed funding, expertise and advanced technology to stimulate product innovation.