The functioning of the national innovation system (NIS) is based on performance of its fundamental functions: production, storage, distribution and use of new economic knowledge. any other system, the NIS may have dysfunctions. The primary factors of system dysfunctions caused by systemic failures include the following: a shortage of actors’ incentives for activities in NIS, lack of absorptive and innovative capacity and shortage of competency of actors, insufficient resources and a lack of partners providing the performance of NIS processes, disruption of interaction coherence and bounding strength, a complexity and failures of the framework conditions. The system dysfunction resulting from the action of the factors and market failures induces public policy makers to intervene into formation and development of the NIS. To select and specify the NIS components that public policy should address, policy tools are bound to the NIS horizontal and vertical decompositions. During the horizontal decomposition, the NIS is presented in the form of three interrelated macroblocs. They are business environment and markets, environment producing new knowledge, knowledge transfer and diffusion mechanisms. During the vertical decomposition, every macrobloc should be divided into NIS subprocesses. Besides, the investment-driven and innovation-driven stages are taken into account to shape the main dimensions of the pubic policy.
Keywords: innovation system, factors, dysfunction, actors, public policy, stages of development