Abstract Research has shown that government policies and regulations can promote or hinder innovation. Policies and regulations that are stringent and focused can potentially stimulate significant and fundamental changes in product and process technology. However, policies and regulations can create obstacles and restrictions that sometimes pose a hindrance to innovation. Thus, while a number of innovation diffusion policies have been practiced in an incremental and ad hoc manner in many developed and developing countries, absent a set of research propositions, little empirical work has been well-positioned to investigate the effectiveness of these policies. In reviewing the existing literature on policy and innovation, it is possible to propose several research propositions regarding the role of government policy in promoting and sustaining innovation through the mediating factors, namely, the firm's willingness, capacity, and opportunity to change. In addition, the current state of the field on the theory and practice of innovation offers the opportunity to suggest propositions for investigating how government policies impact two different types of innovation, namely incremental and radical innovations. These research propositions offer implications for the policy makers and managers in general.