The economic analysis of technology policy suggests non-distortive public support of private innovative activities with a stress upon basic rather than applied research. Actual technology policy in Germany is marked by a high degree of sectoral selectivity which results from the dominance of direct project support. The second main feature of the German innovation system is the strong persistence of the structure of public research institutions, although technological priorities have significantly changed over time. Public support to private R&D should be reoriented towards indirect measures, and public research institutions should be more exposed to competition.