Latvia is a territorially small country with small open economy, and its main and the most competitive recourses are highly educated society and well developed science which is based on research, innovation and modern technologies. To create a well functioning innovation system as a part of knowledge-based economy, several conditions has to be met to insure that all parts of national innovation system effectively work together. This article is dedicated to analysis of financing mechanisms that can be used by research institutes in the field of agriculture in Latvia to ensure sustainable rural development. The research in the field of agriculture in Latvia is mainly performed by the state research institutes and research agencies of Latvia University of Agriculture. To provide favourable environment for development of research and science, there is set legislation framework and financing mechanisms such as base financing from the state budget, state research programmes, European Commission Framework Programmes, and the European Union (EU) Structural Funds assistance. The analysis has shown that support of EU Structural funds has positive impact on number of applied research carried out in research institutes in the field of agriculture in Latvia. EU Structural funds assistance helps to develop fundamental research activities and innovative approach to the science that is one of the preconditions for the development of states' competitiveness. In conclusion, the authors resume that it is necessary to establish a strong link between higher education institutions, research institutes, and entrepreneurs in the process of building effectively working national innovation system.

The changing economic and social situation in the regions leads to the changing understanding of the potential which exists in the countryside. This research is based on the idea that farmers operate in close neighbourhood with the local communities and therefore they may hold a potential to start innovation processes in rural regions as agents of change. This may happen individually or together with the local community. Farmers are active in acquiring new knowledge and experience through collaboration with advanced innovation centres in research laboratories and universities, and sharing with the local community, thus making these innovations open. The success of innovators comes in line with the collaboration and therefore the defined three key factors of ‘innovating together’ in this research are: first, the shift from technical to organizational innovations; second, the shift from sectorial to territorial rural development strategies; third, the size of farms and rural enterprises due to the limited number of employees. Theoretical findings are followed by empirical investigations from representative data collected in Lithuanian farms in 2017, supported with relevant statistical analysis. Research results show that the potential for ‘innovating together’ in Lithuanian farms is rather weak when taking into account all three factors. However, there are reasons behind this which give insights for future developments in the field.