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Innovation in its many forms has been recognized as a critical dimension in improving economic performance in knowledge-driven economies. The innovation activity of firms is a key driver of competitiveness and economic growth. Although the process occurs at a company level through skilful management, a firm's innovation performance can be enhanced by appropriate policy measures conducted in a business-friendly environment. This document identifies policy options and instruments available to enhance the innovative capabilities of firms. It is illustrated with examples of practical know-how, hands-on experiences and case studies with a view to developing practical guidelines.