Inovation is recognized as crucial for the Latvia’s development of a knowledge-based and sustainable economy, as well as country’s overall national and social development. The purpose of the policy-makers is to foster research and development (R&D) in private and academic sectors. The aim of the research is to show the significance of innovation as an interactive and gradual process, that based on communication and knowledge exchange of organisations and individuals; to classify and analyse policy instruments used by government to promote science, technology and innovation collaboration.A taxonomy to classify the industrial policy instruments of Latvia and the benchmarking analysis to compare this instruments in Baltic states is proposed. The mathematical modelling is the tool for the assessment of the interrelation between Research and development (R&D) and GDP growth in Latvia. The aim of an economic policy of Latvia is to activate industrial policy, including science, technology and innovation. An important challenge is to promote a central role of cooperation between small and medium- sized enterprises (SME), universities, research centres. Government must provide most of the funding for R&D activities, to increase interaction between private sector and universities, to define innovation policy priorities and instruments. Subsidies and tax incentives for R&D could become an important tool for the country to increase an innovation capabilities and the growth of GDP. The task of the research is to promote positive decisions focused on the public financial support provided through R&D tax-incentives, direct government subsidies (competitive grants, venture-capital public funds), support for innovation commercialisation; to foster public-private joint research, cooperation between universities and business; to promote implementation of procurement programs for technology development and innovation and the protection of intellectual property. The use mathematical modelling could help to detect the interrelation between R&D and the growth of GDP in Latvia.