In this study, we review the literature on the creation and diffusion of innovation in the private sectors (industry and services) in developing countries. In particular, we collect evidence on what are the barriers to innovation creation and diffusion and the channels of innovation diffusion to and within developing countries. We find that innovation in developing countries is about creation or adoption of new ideas and technologies; but the capacity for innovation is embedded in and constituted by dynamics between geographical, socio‐economic, political and legal subsystems. We contextualize the findings from the review in the current theoretical framework of diffusion of innovations, and we emphasize how the institutional context typical of developing countries impacts the diffusion itself.