Purpose: The main aim of this paper is to develop guidelines on the critical issues to consider in research design in an action research (AR) environment for SME network capability development. Design/methodology/approach: The issues in research design for AR studies are developed from the authors' experience in running learning sets but, in particular, by an SME owner-manager learning set established to develop and test theory about network capability. Findings: The authors present a comprehensive set of research design issues for AR across seven areas--sampling; the facilitator; learning set interaction; set design; measurement; data collection decisions; and data analysis. Research limitations/implications: While action research is inherently situational in approach, for those researchers wishing to use it to develop or test theory, the authors' framework will provide a benchmark for research design decisions. Practical implications: The methodology is ideally suited to knowledge exchange settings and for collecting research data in such contexts and, if used in this way, could be an incentive to encourage more academic engagement with practice. Management and organisational development using AR is often reported on, but rarely in an SME context. The paper provides an example of a study conducted in this setting. Originality/value: The main contribution of this article is to present an implementation framework for research design using AR. In addition, given policy goals now often require firms to collaborate with each other and in partnership with training organisations and universities, it makes sense to develop a mechanism to enhance the understanding of research methodologies that can be used in these contexts. (Contains 2 tables.)