Inter-firm competition in SMEs can either stimulate technological learning or erode firms’ knowledge-based capabilities. This study addresses the problem of how competitive pressure shapes technological learning among small and medium-sized enterprises in Lorestan Province (Iran), and aims to develop an explanatory model that clarifies the mechanisms through which competition leads to constructive or destructive outcomes. Using a qualitative, applied design, the research followed Strauss and Corbin’s systematic grounded theory approach. Data were collected through semi-structured interviews with industrial SME managers, industry experts, and relevant ecosystem actors, and were analyzed via open, axial, and selective coding. Findings indicate that competitive pressure operates through two distinct pathways depending on institutional conditions, absorptive capacity, and inter-firm network interactions. In the constructive pathway, quality-based competition encourages process improvement, capability upgrading, and active search for technical knowledge, resulting in technological learning. In the destructive pathway, price undercutting, information concealment, and low trust reduce margins and weaken absorptive capacity, pushing firms into a “survival trap” characterized by short-term, non-learning responses. Moreover, coopetition emerged as a key bridging mechanism: pre-competitive upstream collaboration (e.g., shared testing facilities and joint problem-solving) alongside downstream market competition can help shift firms from destructive to constructive dynamics.