Adoption and adaptation of foreign technology is an important catch-up mechanism for developing countries and can contribute towards the achievement of the millennium development goals. Despite this until now very little foreign aid has been specifically targeting innovation in developing countries - more substantial aid has been promoting ‘private sector development’ (PSD) – or entrepreneurship – so that one can see PSD initiatives to have been the major channel through which donors have been promoting innovation in developing countries. Whether this has been an appropriate channel, with appropriate instruments, is the first of two main questions that will be addressed in this paper. The second main question is how PSD initiatives should be adapted or fine-tuned to provide greater and more effective support for appropriate innovation activities in developing countries – and by implication make foreign aid more effective. In this regard two aspects that will receive particular attention are the entrepreneurship-government relationship, and the innovation policy-stage of development dimension.