In today's competitive world, design and innovation capabilities are the main drivers of industries' sustainability in free zones. However, many nascent industries in these areas face fundamental challenges in establishing an innovation system. This research aims to diagnose the design and innovation processes in home appliance manufacturers located in the Aras Free Trade-Industrial Zone. The research approach is qualitative, and the method used is grounded theory. Participants included managers and experts in the home appliance industry in the Aras region, and semi-structured interviews were conducted with a total of 20 people using purposive sampling based on the saturation criterion. Data analysis was performed in three stages of open, axial, and selective coding using MAXQDA software. The results showed that the central phenomenon of the research is "stagnation and weakness in the maturity of innovative design," which indicates the dominance of imitative approaches over radical innovations. Causal factors included "lack of specialized design body, weak links with the global supply chain, budget constraints and weak investment, and the effects of sanctions and import restrictions." Inhibiting contextual factors were explained in the form of "equipment obsolescence, weak cooperation and support, and institutional complexity and bureaucratic weakness." Also, "the multiplicity of decision-making institutions and complex bureaucracy" act as intervening conditions. To overcome this situation, strategies such as "providing financial incentives, establishing specialized design consortia, and establishing technology transfer platforms" were identified. Finally, the consequences of implementing these strategies will be reflected in the form of "diversifying the product portfolio with high added value, and promoting the position of domestic brands in export markets."