Innovation plays a key role in economic progress and lifting living standards. The most critical factor in encouraging innovation is getting the framework conditions right so that businesses can flourish. This chapter concentrates on the more specific aspects of innovation in Canada to identify where policies could be improved. It first reviews Canada’s performance on innovation, which is relatively good on product innovation but weaker on processes. The country’s innovation strategy focuses on knowledge, skills, the innovation environment and community-based innovation. Public R&D needs to be governed by an integrated strategy, while generous tax credits for business R&D should be re-examined. More attention is being paid to commercialisation of R&D. A skilled and talented workforce helps to diffuse innovation through the economy, but while Canada has enough scientists to meet current demand, it lacks people with management, marketing and other business skills. Diffusion would also be aided by lifting general literacy and life skill levels. Well-designed co-financing arrangements would encourage participation in adult education and training. Lastly, the venture capital market would perform better if the tax advantage provided to Labour-Sponsored Venture Capital corporations were removed.