Significant progress has been made in recent years in the development of enterprise policy in the Western Balkans. Issues remain, however, in the support provided for innovative enterprises. In this paper we use data from the 2005 Business Environment and Enterprise Performance Survey to identify the determinants of innovation in locally-owned firms in the Western Balkans and compare these to the other CEEE countries and the CIS. Based on an econometric examination of the innovation production function in each area we observe marked differences in the determinants of innovation. First, in the Western Balkan countries (WBCs) R&D and higher-level skills have little impact on firms' innovation outputs, a result which contrasts strongly with results for the CEEE, CIS and other more developed economies. Second, we find no evidence of innovation benefits from urban locations in innovation in the WBCs or that public support is having any positive effect on innovation outcomes. Again, this experience is at odds with evidence from other regions. Third, innovation outputs in the WBCs are being negatively influenced by aspects of the business environment. These results suggest a need for an active and rather interventionist innovation policy in the WBCs to address these system failures. A range of policy options are developed.