Innovation has been assuming an increasing role in regional policy over the past three decades. Public policies have been moulded by “best practice models” associated with new technologies and successful urban-metropolitan areas. However, the lessons obtained from these examples are seldom convenient to other territorial environments, and less attention has been paid to the role regional policies grounded on the upgrade of the innovation potential are playing in peripheral regions with structural development problems. The main objectives of this study are to first analyse the main challenges globalization and the knowledge economy bring to those territories. This discussion will be situated in the main theoretical frameworks that may allow a better understanding of the relationship innovation-territory. With an overall view of the Portuguese innovation system and its regional dimensions, insights about the main implications for the design and implementation of territorially embedded innovation policies will be made.